When two parties enter into a contract, they often include a clause detailing what would happen if the contract was breached. In many cases parties will include a clause stating that if the contract is broken, the party who broke the contract will owe liquidated damages.
The contract will usually specify the amount of liquidated damages owed. The amount will be calculated based on the amount of loss the aggrieved party is likely to suffer due to the other party’s breach.
When are liquidated damages enforced?
A liquidated damages clause in a contract is only enforced in certain situations. Generally, a liquidated damages provision may be enforced by a Texas court if:
- The amount of liquidated damages is reasonable and is not intended to punish.
- Damages were difficult to predict when the contract was first created.
- Whether the parties entered into the contract in good faith.
What is the benefit to having a liquidated damages provision?
If a contract is breached and there is no liquidated damages provision in the contract, the aggrieved party may have to prove that they suffered actual damages as a result of the breach. Proving actual damages can be challenging. However, it is important to remember that these provisions may also be biased toward a party with more bargaining power (e.g., a large company).
To ensure that your liquidated damages clause is enforceable, it is important to make sure to draft it clearly and make sure that the amount chosen is truly reasonable. A provision with an unreasonably large amount of liquidated damages may be deemed unenforceable during business litigation.