When reviewing your real estate purchase contract, you may wonder whether if it is beneficial to include a liquidated damages provisions in the agreement. A liquidated damages provision establishes at contract formation the amount of damages to be paid if one party breaches the contract. This type of damages clause is generally included when damages may be difficult to ascertain if a breach occurs. It can apply to either party or just to one party, depending on the type of contract and the positions of the parties. Liquidated damages are often used in construction contracts to compensate for unplanned delays in substantial performance of the the obligations under the construction contract.
The parties to a contract must first ensure that the clause is drafted in such a way that it is deemed enforceable. As a guiding principle, the clause must impose reasonable damages on the breaching party and cannot represent a penalty. Deciding whether a damages clause is considered reasonable takes into account certain factors. This includes the bargaining power of the parties, the parties’ knowledge of what would happen in the event of a breach, the specificity with which damages are outlined in the contract, the degree to which the damages amount is warranted, and whether the clause was separately bargained for by the parties as part of an active negotiation. The courts, in determining the enforceability of this clause, will look at the intent of the parties and not rely on how the parties identify the clause in the agreement.
Assuming the liquidated damages clause is well drafted, its inclusion in a contract has several potential advantages. First, determining a dollar amount to be paid when a contract is breached eliminates ambiguity about damages. Parties can agree on an estimate that represents their best guess as to the losses the non-breaching party would incur.
A liquidated damages clause is an efficient way to resolve disputes outside of a courtroom setting. In the event of a breach, the parties can turn to the contractual provision which specifies the amount to be paid to the non-breaching party. This relieves the non-breaching party from having to prove damages in court and perhaps waste significant amounts of time and money litigating his claim.
The experienced team of attorneys at the Law Offices of Mark Weinstein, P.C. can help you litigate your real estate claims. Contact Mark Weinstein and his colleagues at (770) 888-7707 or visit them at http://www.markweinsteinlaw.com to find out how they can advise you.