- posted: Oct. 22, 2024
A liquidated damages clause in a contract sets a predetermined amount of money that one party must pay to the other in the event of a breach. These clauses are common in commercial and residential real estate agreements, employment contracts and other transactions where the precise amount of damages may be difficult to quantify in advance. However, Florida courts scrutinize these clauses to make sure they are based on a reasonable estimate of damages rather than constitute a punitive measure.
A liquidated damages clause gives predictability to contract execution. The contracting parties can use the clause to allocate risk in accordance with their respective bargaining power, risk tolerance and business objectives. In a real estate contract, a clause might stipulate that the deposit will be forfeited if the buyer backs out of the sale without justification. This is designed to compensate the seller for any loss caused by keeping the property off the market.
Liquidated damages clauses also can minimize litigation. By defining damages in advance, they reduce the need to determine the extent of losses after a breach. In addition, they protect parties from the unpredictability of jury awards and help avoid the difficulty of proving actual damages, which may involve extensive discovery and expert testimony.
Liquidated damages clauses in contracts for the sale of goods are governed by Florida Statutes § 672.718. It states that such a clause is enforceable only if the amount of damages stipulated is reasonable in light of either the anticipated or actual harm caused by the breach, the difficulties of proving loss, and the inconvenience or non-feasibility of obtaining an adequate remedy otherwise. In essence, the clause must estimate damages fairly rather than serve as a penalty for nonperformance.
For example, if a contract for the sale of goods includes a liquidated damages clause that requires a party to pay an amount far in excess of the value of the goods or the foreseeable losses from nonperformance, a court may strike down the clause as punitive. If a clause is overly one-sided or was imposed by a party with disproportionate bargaining power, a court may likewise find it unenforceable.
Liquidated damages clauses must be carefully drafted to comply with the requirements of Florida law. Parties to a contract should seek review by an experienced Florida contracts attorney ensure that their liquidated damages provisions reflect a fair estimate of potential losses and are tailored to the specific circumstances of their agreement.
H. Clay Parker, Esq. advises Central Florida clients on a full range of contract matters, including negotiations and disputes. Please call [ln::phone] or contact us online to schedule an appointment at our Orlando office. In cases related to civil or business litigation, we offer a $50 initial consultation.
