What Are Liquidated Damages, and Are They Enforceable?

Introduction

In performance contracts, such as the construction of a building or delivery of goods, timing is essential. For example, you have hired a contractor to build-out your office space, and the contractor has agreed that it will take 12 months to complete the project. If it is not completed by the end of that 12-month period, damages are bound to be incurred. Paying double rent, double utilities, and other costs associated with inconveniences should not be covered by the owner of the project. However, it is often difficult to calculate, thus parties usually agree to an amount for delay of performance called liquidated damages.

What are Liquidated Damages?

Liquidated damages are an amount of money, agreed upon by the parties at the time of the contract signing, that establishes the damages that can be recovered in the event a party breaches the contract.  The amount is supposed to be formulated to reflect the best possible estimate of actual damages that would be incurred when the parties sign the contract.

By their very nature, liquidated damages clauses seem to be punitive, which is not typically allowed in Louisiana.  For that reason, they are to be construed very strictly and are limited to recovering true liquidated damages.

Louisiana and Liquidated Damages

Liquidated Damages clauses are very common in Louisiana performance contracts, but oftentimes, they seem insignificant and are easily skimmed over.  Despite their seemingly innocuous nature, they can cause big problems for your business.

Louisiana law states that true liquidated damages represent an amount, arrived in a good faith effort by the parties at the time of contracting, to reasonably estimate the monetary loss which will probably be sustained in the event of a breach.  Courts hold that no matter how clearly a liquidated damages clause is written, the clauses should not be enforced or upheld if they are not for true liquidated damages.

While liquidated damage clauses come in varying forms, one of the most common functions is to protect an owner from damages due to the other party’s breach of contract (usually involving a failure to complete work on time).

Louisiana law generally holds that if you agreed to a contract’s terms, you are governed by those terms.  However, as recently as 2018, Louisiana courts have held that when liquidated damages clauses do not contain definitions of any and all terms that could be interpreted in more than one way, they are too ambiguous to be enforced as a matter of public policy.

So, are Liquidated Damages Clauses Enforceable?

If a clause contains an arbitrary penalty per day that a contract is not completed, it is probably not enforceable.  However, if the clause contains a formulaic breakdown of the damages that will be incurred in the event of a breach, a court could uphold the clause.

As recently as 2018, Louisiana courts have held that when liquidated damages clauses do not contain definitions of any and all terms that could be interpreted in more than one way, they are too ambiguous to be enforced as a matter of public policy.  Courts have consistently held that when the penalties of a liquidated damage clause cannot be reasonably calculated to relate to actual damages suffered, the clause should not be enforced.

What About My Liquidated Damages Clause?

If your business is being accused of breach of contract and threatened with liquidated damages, call Favret, Carriere, Cronvich and speak to one of our attorneys who can analyze the contract at issue and help you through the process of denying or negotiating the claim.

Additionally, the professionals at Favret, Carriere, Cronvich would be happy to help your company draft a liquidated damages clause that could be essential to getting the best out of vendors or subcontractors and help protect your business.

Liquidated Damages clauses can be a good way to protect your business’ interests, but as with most useful tools they can cut both ways.  Whether disputing liquidated damages owed or drafting a strong liquidated damages clause, the attorneys at Favret, Carriere, Cronvich are ready and willing to utilize their expertise to help your business continue to thrive.

Should you have any questions or you would like to discuss this issue in further detail, please do not hesitate to contact us to schedule a free consultation.