Liquidated Damages Provisions – are they valid?
What is a liquidated damages provision, and why should you care?
Just this morning I was reviewing a Release / Non-Compete Agreement that contained language like the following:
The parties agree to liquidated damages in the amount of $10,000.
What does that really mean?
1. Depends on state law
Well to begin, what it means depends on the state law that governs the contract. Each state has unique and differing set of laws that govern the construction and enforceability of contract provisions. So what may be legal, binding and valid in one state, could be unreasonable and invalid under another state’s laws. This applies to all contractual provisions, including liquidated damages clauses.
2. Read the actual language
Second, you need to read and try to understand what the provision is actually saying. Often folks assume a liquidated damages clause is a penalty or a way to avoid the court system.
Like a trigger – if I allege you did x, you pay me y and we go our separate ways. Thankfully, this is not what happens.
Under Virginia law, you cannot avoid the court system simply because a liquidated damages clause exists. It is a provision that will only be enforceable IF there is an actual breach of the contract, damages have occurred, but the financial damages are difficult to calculate. Therefore, the amount of damages is defined by what the parties agreed to. Even if you have such a provision in a Virginia contract, you must prove breach, and that you cannot reasonably calculate the actual damages.
Practically speaking, they are not often enforceable under Virginia law. AND you still have to get the Courts involved to determine breach, etc. So when I see them, I don’t often get too worked up knowing that practically speaking, the provision is not likely going to be binding on my clients.
So when you see a liquidated damages provision in your contract, take the time to understand what it actually means, and decide whether you want to agree to those terms.
Things are not often what they seem in a lengthy contract. Just because you have such a provision, doesn’t mean you have to automatically pay the damages as a penalty if breach is alleged. You still have to prove breach, and under Virginia law, prove that actual damages exist but cannot be reasonably calculated.
So, do I advise my clients to sign the liquidated damages provision? Depends on the case, the client, the amount etc. All the more reason to get yours reviewed and understand your obligations.