If you enter into a contract, and there is a breach of that contract, you expect that your damages are whatever you lost because of the breach. And in your breach of contract case, you probably think most about whether you will win your case, not giving much thought to how much you will win—after all, it seems obvious: just read the contract and see what your damages for the breach are.
But in many cases, the amount of damages that you sustain because of a breach of contract isn’t so obvious or easy to calculate. Read on as our Chicago business litigation lawyer at Ellis Legal explains more.
Difficulty Calculating Damages
For example, imagine a scenario where someone steals your trade secrets. You don’t know who has accessed those trade secrets, and you can’t calculate how much someone else may have benefitted from the illegal use of your trade secrets. But you know that you have been damaged by the misuse and misappropriation of trade secrets.
Other things, like damage to your reputation, or someone using your likeness, or using your intellectual property, all cause you damages, but it would be hard, if not impossible, to show a court what you have lost in dollars and cents.
What are Liquidated Damages?
This is why liquidated damage clauses are used. Liquidated damage clauses are just agreed-upon amounts of damages in the event that a contract is breached. With a liquidated damage clause, you only need to show the breach of the agreement, not how much the breach has cost you, because the liquidated damage clause says what your damages are in the event that a breach is proven.
But courts don’t just allow you to put any amount in your contract as liquidated damages. To be enforceable, your liquidated damages clause has to bear some reasonable relationship to your damages, even if you can’t say that they are exactly your damages. They must be a reasonable and fair estimate or forecast of your losses in the event of a breach.
You can’t use your liquidated damages clause as a “threat” to get someone to perform by including a clearly excessive damages clause. If your liquidated damages are too excessive, they will be seen by a court as simply punishment or a penalty and, thus, will be unenforceable.
You must also show the court that you needed the liquidated damages because damages in your case would be difficult or impossible to prove. In other words, if you can easily determine what your damages are in the event of a breach, you can’t include a liquidated damages clause.
Language in Your Agreements
In many contracts where liquidated damages are necessary, the parties will include language, agreeing that damages can’t be quantified, and agreeing that the liquidated damages amount, is fair and reasonable. While not foolproof, that can go a long way to showing a court that the liquidated damages clause is enforceable.
Don’t leave your business contracts to chance. We can help make them enforceable. Speak with a Chicago business litigation attorney at Ellis Legal at (312) 967-7629 today.