Contracts And Liquidated Damages

So you are reviewing a contract and you come across a provision relating to “liquidated damages.”  You ask yourself: “What in the world could that be?”  In a recent case decided by an Ohio Appellate Court, the court held that liquidated damages are “an agreed upon amount of money to be paid in lieu of actual damages of a breach of contract.”  The case involved the contract between a college coach and the university.  The coach and the university agreed to a four year contract.  If either party terminated the contract early, as in the coach taking a job at another university, then the coach owed the university the amount of the salary for each year remaining under the contract.  The university filed a lawsuit against the coach in order to force the coach to pay the liquidated damages.

The coach attempted to challenge the enforceability of the provision.  The appellate court followed the following test to determine if the liquidated damages provision was enforceable.  First, would the damages be uncertain as to the amount and difficult to prove?  It is more likely that a damage calculation will be uncertain or difficult to prove if you personally have to provide a service which is unique to your abilities or your failure to timely perform your obligations and such failure results in delays for other parties working on a project.  A damage calculation is not difficult to prove if the non-breaching party can simply go into the market and purchase replacement goods.  Second, the court has to look at the entire contract to make sure it is not so manifestly unconscionable, unreasonable and disproportionate in amount to justify the conclusion that it does not express the true intentions of the parties.  A court will find a liquidated damages provision unconscionable if it did not result from “real bargaining” between the parties who had freedom of choice and understanding and ability to negotiate the terms in a meaningful way.  The court also ruled that the non-breaching party does not have to prove that actual damages resulted from the breach in order for the damages to be reasonable.  Third, the contract is to be consistent with the intentions of the parties.  A court will look to see if the liquidated damages provision is clear and not ambiguous.

The court also has to determine if the liquidated damages provision was actually an illegal penalty which punishes the breaching party instead of fairly compensating the non-breaching party.  This determination is made based on the facts of the particular case.  A possible awarding of damages in a case could always deter a party from breaching a contract since the award of damages could deter a breach.  In such a situation, the court will look to see if prior to the liquidated damages provision being included in the contract that the parties contemplated that a breach could result in losses to the non-breaching party.

The moral of this story is to fully read and understand the provisions in your contract.  As they say, the devil is in the details.  For example, if a contract will force you into a very tight timeline and you can foresee a very real possibility that your performance could get delayed for one reason or another, then carefully review your contract to determine if such a liquidated damages provision is included in your contract.  As for the coach, the coach terminated the contract with two years left and the court ruled that he had to pay the university the amount of his salary for the time remaining under the contract.

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Chris Corpus

Founding Partner at Corpus Law Inc

This article does not provide legal advice or create an attorney-client relationship. If you have any questions or would like to learn more about this topic or if you have other legal questions, do not hesitate to contact Chris Corpus, Esq. of Corpus Law Inc at 216-973-2475. Copyright Christopher A. Corpus 2016.