What happens when you suffer harm from a breach of contract that you cannot prove or would have a very difficult time proving? Such as for a delay? Often your damages will go unreimbursed.
One typical situation is for delay in contract performance– “Time Is Money,” right? The proof of damages under this axiom is often nearly impossible or at least impractical. For example, if a construction delay causes you to open your new business four weeks later than planned, how do you prove damages? You have no history of income and it would be claimed that any damages would be pure speculation. Enter liquidated damages.
When to Use a Liquidated Damages Clause
A liquidated damages clause sets a fixed amount to be paid upon the occurrence of a specified event.
Delay is a typical triggering event in construction contracts, supply contracts, employment contracts, or any other contract where “time is of the essence.” The phrase “time is of the essence” holds a legal meaning that puts the parties on notice that delay will result in a breach and will trigger damages. A liquidated damages provision protects the non-breaching party from delay by determining in advance the amount that the breaching party must pay for every minute/day/month (whatever the important time calculation) of delay.
Inclusion of a clause forces the parties to stay on schedule and avoid the fixed damages. The following is a typical liquidated damages clause in a construction contact:
Time is of the essence of this Contract. If the Contractor shall neglect, fail, or refuse to complete the Work within the time specified for Substantial Completion in the Contract, then the Contractor does hereby agree, as a part consideration for the awarding of this Contract, to pay to the Owner, as liquidated damages and not as a penalty, the sum of $_______________ per day for each calendar day beyond the dates set forth in the Agreement that the Contractor fails to achieve Substantial Completion for the Project. The said amount is fixed and agreed on by and between the Contractor and the Owner because of the impracticability and extreme difficulty of fixing and ascertaining the true value of the damages which the Owner will sustain by failure of the Contractor to complete the Work on time, such as loss of revenue, service charges, interest charges, delays caused to other construction activities of Owner by failure to perform this Contract, and other damages, some of which are indefinite and not susceptible of easy proof, said amount is agreed to be a reasonable estimate of the amount of damages which the Owner will sustain and said amount shall be deducted from any monies due or that may become due to the Contractor, and if said monies are insufficient to cover said damages, then the Contractor shall pay the amount of the difference.
Utah Liquidated Damages Law
Utah courts have provided very clear guidance for the use of liquidated damages clauses. You may find in other jurisdictions or states, however, that such a clause is disfavored or possibly void as a penalty. Not so in Utah.
“It is not our prerogative to step in and renegotiate the contract of the parties.”
Substantive unconscionability focuses on the terms of the contract. It requires you to examine the relative fairness of the contract at the time it was entered into. Even if a contract is unreasonable or more advantageous to one party, the contract, without more, is not unconscionable. Rather, in order to find that the contract [or contract terms] is substantively unconscionable, you must find that [name of party] proved the following by clear and convincing evidence:
(1) That the contract terms are so one-sided as to oppress or surprise an innocent party, or
(2) That the contract terms result in an overall imbalance in the parties’ obligations and rights that is inconsistent with accepted customs and business practices at the time and place the contract was made.