I am very favorable toward the use of liquidated damages clauses in contracts. For those who have not read about this in the past on this site, such a clause defines the amount to be paid by a party who breaches a contract. It can save the parties the time, expense, and uncertainty of proving damages.
But, as noted in an appellate opinion today, these clauses are not always enforced. Under the law, the clause is facially valid. Enforcement of the facially valid clause requires a showing that the amount due and owing “ is reasonable . . . in . . . light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.” Gorco Constr. Co. v. Stein, 99 N.W.2d 69, 74 (Minn. 1959). If the actual damages resulting from a breach are measurable and liquidated damages are “greatly disproportionate” to them, the liquidated-damages clause is unreasonable and a penalty. Id. at 75.
Lost profits is a classic example of a difficult to prove damage. Setting an amount for that damage can be very beneficial. The calculation must be reasonable and based upon some objective data or your proven experience.
Think about whether such a clause is useful to you in your situation. Now is a great time to be looking ahead to utilizing such a clause to protect you in your transactions.
