In New York and around the country, the term “liquidated damages” often refers to an entire clause or section of a contract as well as the money involved. These are damages that a party who breaches a contract is required to pay when proving actual damages would be difficult. Provisions in construction contracts that require contractors to pay a specified amount for each day a project continues after an agreed-upon completion date are a common type of liquidated damages.
Fair and not punitive
Provisions that deal with liquidated damages are often challenged in court, and judges may be reluctant to enforce them if they are punitive in nature or the party seeking payment somehow contributed to the breach. Liquidated damages should compensate a party for actual or anticipated losses, but they must be reasonable and cannot be used as a punishment. Courts may also refuse to enforce liquidated damages provisions in contracts if the losses suffered by the injured party can be easily quantified.
New York case
This is what happened in a breach of contract case decided by the New York Supreme Court in 2018. The case involved a quantitative trading company that sued a technology provider for more than $1 million in liquidated damages for failing to provide agreed-upon services in a timely manner. The court did not enforce the liquidated damages provision because the actual damages suffered by the plaintiff were only about $170,000.
Fair and appropriate
This case shows that the courts will not hesitate to strike down liquidated damages provisions that appear to be unreasonable or punitive. Therefore, parties negotiating contracts should take care to ensure that any provisions dealing with liquidated damages are fair and appropriate. When contracts are breached, the injured party should seek actual rather than liquidated damages if their losses can be measured.