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Friday, March 20, 2009

Liquidated Damages

Liquidated Damages is a dollar amount stipulated in a contract which the parties agree is a reasonable estimation of the damages that would be owed to one party in the event of a breach by the other party. Companies often rely on liquidated damages clauses to assure performance of the contract.

Since the amount of damages is often difficult to ascertain when there is a breach, a liquidated damages provision attempts to fix the amount. Even if the parties agree to a liquidated damages clause, the Court will only award the actual damages suffered if they can be ascertained. In theory, the clause also saves litigation time and legal fees.

WHEN VALID: The Commonwealth of Virginia recognizes liquidated damages clauses in contracts as valid under the following conditions: (1) The figure must be a reasonable amount contemplated at the time of contract to be the probable loss to the non-breaching party in the event of a breach; (2) The amount cannot be punishing or punitive damages, grossly in excess of the actual damages; and (3) The damages must not be susceptible of a definite measurement.

The Court examines the conditions at different times of the contracting parties' relationship. When looking at the first and third conditions, the court examines them from the time of the contract. The second is examined at the time of breach.

ACTION ADVICE: In order to improve the likelihood of enforcement of a liquidated damages provision, a contract clause should state that the opposing party waives their right to contest the enforceability of the liquidated damages clause. In Gordonsville Energy v. PEPCO (1999) the Virginia Supreme Court upheld such a waiver of rights provision.

INTERESTING NOTE: Virginia § 6.1-330.63 allows credit card companies to charge any amount of liquidated damages as late fees.

This brief article is only meant to provide a very broad overview and cannot be relied upon as a substitute for legal advise. Contact Gross & Romanick if you need information about your specific situation.