Liquidated Damages

Liquidated damages can be useful in certain business contracts, because they provide certainty on the amount of damages to be paid in the event of a breach. Think of a college football coach who signs a 10-year contract then voluntarily leaves after 2 years, leaving the program in disarray. In such a context, a liquidated damages provision may be useful for all parties involved.  

However, Liquidated damages are only appropriate where the actual amount of damage in the event of a breach would be difficult to determine or prove. The amount of liquidated damages must be a reasonable estimate of the damage, and not a penalty.  Liquidated damages that are excessive, unreasonable, or inappropriate may be deemed void. Remember, while a liquidated damages provision may allow parties to step of determining the amount of monetary damages, a party alleging breach of contract still has prove a breach occurred (i.e., satisfy all the elements of a claim for a breach of contract under the applicable law).   Also: the inclusion of liquidated damages in a contract does not preclude the issuance of an injunction.