Providing for Liquidated Damages In Delaware Contracts
As a Delaware business attorney, I’ve been involved in a lot of lawsuits over a breach of contract. During the trial, the plaintiff has to prove both liability and damages. Liability means that the defendant breached a valid and enforceable contract. Damages is the money the plaintiff claims he has lost or will lose as a result of the breach.
In some cases, it’s easy to prove damages. For example, you have a contract with a customer to pay you $75,000 for your services, and the customer fails to pay. However, in other cases, it can be difficult if not impossible to prove damages. A good example is where you buy a business, and you and the seller include in the purchase agreement a non-compete agreement prohibiting the seller from starting a business that competes with the one you just purchased. If the seller breaches the non-compete provision, how can you quantify and prove your financial losses that result from this breach? The answer, of course, is you really can’t.
Therefore, when you’re negotiating a contract, one of the important questions to consider is whether, in the event of a breach, you will be able to meet your burden of proving your damages to the satisfaction of a judge or a jury. With the help of an experienced Delaware business attorney, you can discuss that question at length, and protect yourself if it turns out that proving damages could, in fact, be a problem. The way to avoid having to prove damages is to insert a liquidated damages clause in your contract.
A liquidated damages clause is very simple. It states the amount of money both parties to a contract agree up front will be the loss sustained in the event the contract is breached. If you file a lawsuit and prove liability, you won’t have to prove your actual damages if the contract contains a valid liquidated damages clause.
In order for a liquidated damages clause to be considered valid by a Delaware court, it has to meet two main requirements. First, the court has to find that the actual damages that would be caused by the defendant’s breach are either uncertain or not able to be accurately calculated.
Second, the amount the parties agreed upon as liquidated damages must be reasonable. With respect to reasonableness, the Court considers whether the amount is rationally related to any measure of damages the plaintiff could conceivably sustain as a result of a breach. And, the harder it is to calculate the loss, the easier it is for the Court to find that the amount agreed upon as liquidated damages is reasonable.
