Contract Disputes and Liquidated Damages Provisions – Be Careful – The Safeguard You Expect to Protect You Can Backfire!
Are you party to a commercial construction contract or … for that matter, any contract with a liquidated damages provision? If so, a recent court decision gathers attention in other courts and can lead you to unknown surprises – making you regret how you viewed the standard “liquidated damages provision.”
Well, what are “liquidated damages anyway”? The purpose of a liquidated damages provision in a contract is to establish – ahead of time – the compensation that would be owed to a party for a contract breach. Generally, for a liquidated damages provision to be enforceable, the clause must make it clear that the parties have no idea of the amount of damages for a breach, it cannot be a “penalty,” and the parties believe the amount to be reasonable. This kind of provision can help both sides – it makes the unlimited “unknown” a “known,” and for a party who may breach a contract, it can limit the maximum amount of the lawsuit award.
One Court Now Turns the Provision On its Head. In a recent case from Connecticut’s appellate court,* it was decided that the liquidated damages provision may not be honored unless the language clearly states that it is the sole and exclusive remedy. This court decision, as the decision and rationale spreads to other courts, can make a liquidated damages provision meaningless.
What now to do? The challenge that we face at Weiss LLP is to anticipate the unknown when drafting and negotiating contracts; this is one such example. In our experience, when there is a liquidated damages provision, the parties expect it to limit damage awards. Now that one court may have turned this solution upside down, business folks and their attorneys will be required to commit additional work to avoid unlikely results like this. In this particular case, to avoid having your liquidated damages language be turned against you, you should have the language reviewed by experienced and seasoned counsel such as Weiss LLP. We will ensure that the language clearly and concisely meets the parties’ intentions and anticipates cases like the one referred to above. Do not be your own attorney – the law continues to evolve and is complex. Please contact Weiss LLP for further information.
* New Milford v. Standard Demolition Services, Inc., 212 Conn. App. 30 (2022).