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Real estate contracts often contain "liquidated damages" provisions because damages for breach of contract can be difficult and costly to ascertain, and because these provisions can provide the parties added incentive to perform.In deciding whether to use a liquidated damages provision and in drafting one, care should be taken so that a court, potentially years later, does not find that the provision is a penalty and, therefore, unenforceable.The Ridgley Court considered whether the provision should be viewed as a valid charge for a prepayment of the loan principal or as an unenforceable penalty for delinquency in a monthly interest payment. Kim, the court invalidated a liquidated damages provision in a commercial lease which the parties had designated a “deferred rent provision.” The “deferred rent provision” was a conditional waiver which provided for double rent in the event of breach; the landlord would waive the penalty and charge half that rent amount in the absence of a breach.Generally, contractual charges for prepayment of loan principal are valid provisions rather than penalties or liquidated damages for breach. The court held that this provision could not be defended as a reasonable attempt to anticipate damages, stating that a contrary conclusion would allow unreasonable late charges or other penalties to escape legal scrutiny through simple rephrasing as a conditional waiver.This article reviews the controlling authority governing the drafting and enforcement of liquidated damages provisions in California.

If one were to peruse a number of contracts, he or she should not be surprised to find that a majority of the contracts would have what is called a “liquidated damages clause.” They usually look something like this: If the Hotel over-books, then, within 14 days of the occurrence of over-booking, the Hotel shall pay the customer as liquidated damages, and not as a penalty, an amount equal to 30% of the average Room Rate…. 12, 2004)(finding a ,000 penalty for default on a promissory note unreasonable penalty).

In a contract, parties agree on the performance required by each of them.

When one party does not live up to the deal, there is a breach. But how do we get from identifying the fact that damages are owed to actually paying or receiving that calculated amount of money?

Although the law varies by state, here is the Georgia statute on contract damages as an example: “Damages recoverable for a breach of contract are such as arise naturally and according to the usual course of things from such breach and such as the parties contemplated, when the contract was made, as the probable result of its breach.” What this basically says is that upon a breach, the party damaged by that breach must establish what its actual damages are, as defined by this statute.

For example, if a meeting planner cancels a meeting, what is the actual economic impact on a hotel? If you’ve been injured by a breach, you need to first establish how much you’ve been damaged by that breach, put a dollar amount on it, then negotiate a settlement or file a lawsuit.




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