Last week I discussed a case in which a Missouri appellate court upheld personal guarantees when the purported guarantors had signed a promissory note under the words “Personal Guaranty and Acceptance of Terms.” In that same case, the court held that a “late fee” was an unenforceable penalty, rather than an enforceable liquidated damages clause.
I’ve discussed liquidated damages provisions in these virtual pages before. In Liquidated Damages Provisions Can Be Your Friend, But Don’t Overreach, I talk about the difference between enforceable liquidated damages provisions and unenforceable penalties. So many people followed Google to that piece looking for sample contract language that I later posted a Liquidated Damages Clause Example.
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People often come to the blog looking for a sample liquidated damages clause. Although I have a nice little piece explaining liquidated damages provisions and cautioning people to avoid including penalty provisions in their contracts, I haven’t provided sample language.
Liquidated damages clauses should be tailored to the specific situation — this is particularly important because courts won’t enforce penalty provisions. Thus, it’s important that (1) your clause not in fact be a penalty provision and (2) the liquidated damages clause clearly reflect an attempt to compensate the non-breaching party.
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Liquidated damages provisions can be a useful way to ensure that you have a remedy if the other party to a contract fails to live up to its end of the bargain. When things go south in a commercial relationship, proving that a breach of the contract has occurred is only half the battle; the other half is proving damages, which can often be difficult. (The third half is executing on the judgment, but that’s a subject for a different blog.) A liquidated damages clause can help solve that problem.
Liquidated damages are a stated sum of money damages (or a formula for determining the damages) that the parties stipulate to in advance. Here’s a sample liquidated damages clause. [click to continue…]