Owning and operating a business usually involves entering into numerous contracts. Depending on your industry, you may sign several of these legally-binding agreements per year. While you are considering what terms should be included in your contracts, you may be considering using penalty or liquidated damage provisions to protect your interest. Under these circumstances, you may be asking: Are contract penalties better than liquidated damages?
Florida Business Contract Disputes
Generally, when parties enter into a business contract, it’s with the expectation that both sides will fulfill their side of the agreement. However, issues can come up that can lead to one or both sides breaching a contract term. In fact, most business litigation concerns breach of contract disputes. Therefore, as you are developing your contract terms, it’s important to anticipate possible conflicts and what would happen in the event of a breach.
Breach of Contract Damages
If the other party breaches their agreement with you, it could cause you to suffer operational delays and financial harm. If your contract does not provide for this circumstance, your options will be to reach an agreement with the other party or sue them for breach. However, you may be able to add a liquidated damages provision to your contract.
What are Liquidated Damages?
Liquidated damages are damages that the parties agree upon before there is a breach. According to Florida law, liquidated damages clauses are permissible “but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non feasibility of otherwise obtaining an adequate remedy.” However, “a term fixing unreasonably large liquidated damages is void as a penalty.
In other words, a valid liquidated damages clause will be for an amount that could not have been determined when the contract was executed. Additionally, the sum cannot be for an excessive amount (far more than is expected to be caused by the breach) or have been included as a penalty.
Florida courts will also not enforce a liquidated damages clause that is included as a penalty or as an alternative to suing for breach of contract. The point of a liquidated damages clause is that the parties cannot determine the amount of damages. However, if they have the option to sue, they can determine damages.
When is a Term a Penalty in a Business Contract?
A penalty term is a contract provision imposed to serve as punishment for a breach. Liquidated damage contract terms that serve as a penalty are unenforceable. Therefore, when developing a liquidated damages provision, you want to be certain it is not really for purposes of punishing the other party. The best way to avoid this result is by working with an experienced Florida business attorney during the drafting process.
You want to do all you can to protect yourself when drafting your Florida business contract. If you have concerns about including a liquidated damages clause in your business agreement, you should contact an experienced Florida business attorney. Your business lawyer can help you evaluate the scope of your agreement and the foreseeability of possible damages.
Contact an Experienced Florida Business Lawyer
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with commercial leasing, business, and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.