Paul Peter Nicolai
Contract Liquidated Damages Dumped
Updated: Jun 17, 2022
A plaintiff sued to enforce a contract that said that if the other side did business with any of its customers in five years, the offending party would pay the other 25% of the revenue from those customers. The court dismissed the case.
Why This Is Important… This kind of contract clause is a liquidated damages clause. The law says that a liquidated damages provision cannot be a penalty. It has to substitute for actual damages where actual damages are not knowable when the contract is written. It has to base the liquidated damages on an approximation of actual damages to be enforceable. Because this provision had nothing to do with the potential damages suffered, it was unenforceable as a penalty.