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What is a Liquidated Damage Clause?

As a consumer, you may have faced liquidated damages clauses when renting an apartment, booking a hotel room, becoming a member of a club, or entering into similar types of contracts. However, the stakes are much higher if you are a Florida business owner questioning your rights regarding liquidated damages. It is critical to discuss your situation with an experienced business law and litigation attorney, but there is also some useful information you should know.

Overview of Liquidated Damages Clauses

In Florida contract law, a liquidated damages clause is a provision that specifies an agreed-upon, established amount of money that one party must pay for failing to perform according to the agreement. When negotiating the terms of the liquidated damages, the parties are essentially compromising on the estimated amount of financial harm one would suffer due to the other’s breach. These provisions can offer many advantages for both sides, but only if they are properly crafted to be enforceable under state law. A court will decline to enforce a liquidated damages clause if the amount is extremely disproportionate to the harm sustained by the non-breaching party.

Factors That Impact Enforceability

Generally, the interests of fairness and equity apply to liquidated damages clauses. Therefore, there are certain factors a court will consider when determining whether to enforce the provisions, such as:

  • Difficult to Ascertain Damages: A judge may lean toward enforcement of such a clause where the damages from breach are difficult to valuate when the parties execute the contract. In some breach of contract actions, damages are easy: A party to a contract for the sale of goods usually suffers harm in the amount of the purchase price. However, damages for a breach of confidentiality are difficult to assign a dollar amount. The owner of the confidential information may not have an accurate idea of the full extent of the harm.
  • Penalty Versus Reasonableness: Liquidated damages clauses that serve to penalize a party for breach are not likely to be enforced by a court. One indication that a provision is a punishment may exist where the damages amount bears no reasonable basis to the losses suffered. A court will likely not enforce this type of liquidated damages clause.
  • Bargaining Power: Another consideration that is linked to reasonableness of a liquidated damages clause is the relative bargaining power of the parties to a contract. This type of clause may not be upheld when contained within the voluminous, tiny print, boilerplate terms of certain contracts. One party generally has no say in bargaining for the liquidated damages clause, so a court may not find it enforceable.

However, a court may enforce liquidated damages where:

  • Both parties are highly sophisticated in business transactions;
  • Both parties had the opportunity to review, negotiate, and make changes to the contract; and/or
  • Both parties were represented by attorneys in negotiating the liquidated damages clause and other contractual terms.

Discuss Liquidated Damages Clauses with a Skilled Florida Business Law Attorney

If you would like more information on how liquidated damages clauses work in Florida, please contact the dedicated Pinellas County contract dispute attorneys at Clearwater Business Law at (727) 785-5100. We can schedule a free consultation to discuss the specifics of your circumstances.