As a business owner or manager, you deal with a variety of contracts on a daily basis. Trying to understand so many different types of clauses and legalese can be complicated and exhausting. Even if you use a legal professional to help draft and review contracts, you still need to personally understand your contractual obligations, since your business will ultimately be held responsible.
Liquidated damages (LDs) clauses are a popular, practical and easy way to deal with the possibility of contract breaches between businesses without getting bogged down in legal minutiae. LDs clauses are common in many different types of contracts, including commercial construction and engineering contracts, sale or supply of goods contracts, IT development contracts and more.
But just inserting any sample LDs clause in a contract will not suffice—businesses need to ensure that the clause is properly considered, accurately written and enforceable by the courts (not a penalty clause).
A LDs clause in a commercial contract establishes that if a party breaches a particular obligation under the contract, then that party must pay a specified sum of money to the other party as compensation for the breach. The sum payable for the breach is fixed, agreed to by both parties and written into the contract.
LDs clauses can simplify your contracts and provide a host of benefits, including the following:
• The sum specified is payable as soon as the breach occurs. This removes the extensive amount of time and costs it takes for an injured party to bring an action for damages.
• There is no requirement for an injured party to mitigate damages as there is with an ordinary breach of contract claim.
• An injured party simply needs to prove that a relevant breach occurred and does not need to prove any resulting suffering.
• The amount recoverable is already set and not subject to a court’s decision. This brings a greater degree of certainty regarding the contract—parties already know how much they will recover of pay if a certain breach occurs.
• Parties can preserve their commercial relationship. Once the breaching party pays the LDs, both parties can continue performing the rest of the contract without having to initiate legal action.