How to Use a Liquidated Damages Clause in Utah Contracts

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.

The Utah Supreme Court held as recently as 2012 in Commercial Real Estate Inv., LC v. Comcast of Utah II, 285 P.3d 1193, 2012 UT 49, that “liquidated damages clauses should be reviewed in the same manner as other contractual provisions” and not as a penalty. The only limitation on such a clause is the same limitation on any agreement: “A party may challenge the enforceability of a liquidated damages clause only by pursuing one of the general contractual remedies, such as mistake, fraud, duress, or unconscionability.”
Utah courts will not save you or the other party to your contract from a bad deal: “Persons dealing at arm’s length are entitled to contract on their own terms without the intervention of the courts for the purpose of relieving one side or the other from the effects of a bad bargain.”
“It is not our prerogative to step in and renegotiate the contract of the parties.”
The Comcast court found that courts “should invalidate liquidated damages clauses ‘only with great reluctance and when the facts clearly demonstrate that it would be unconscionable to decree enforcement of the terms of the contract.'”
Avoiding the Unconscionability Defense
In order to avoid a claim of unconscionability, make sure your contract terms are not substantively unconscionable. Utah’s model jury instruction on this issue is helpful:

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.

The Take-Away
The gist of the law is that liquidated damages provisions work well in negotiated, arms-length contracts but not so well in a consumer contract. It protects a party from delay or other breaches of the contract that might be difficult or unwieldy in proving. In the consumer arena, you could find yourself subject to the unconscionability defense above. There may be times when it would be appropriate and warranted in consumer contracts, but it should be highlighted or emphasized for the consumer and not buried in the fine print.
A cautionary note as to the amount of the liquidated damages: if you include the liquidated damages clause, a rule of thumb is that it should be reasonable. You have included the clause because it is often impractical and difficult to determine the extent of your damages. Do not take this as an invitation to exaggerate your damages. Keep it as closely tied to what you believe your actual damages would be and you should be fine. You do not want to give the judge a reason to find the clause unconscionable.
There are issues and nuances that cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about contracts or agreements of any kind, call me, Utah attorney Ken Reich, directly. I have represented both companies and individuals in business matters and disputes involving contracts of all kinds, including those with liquidated damages clauses. Using my many years of experience and backed by a firm of legal specialists in nearly every legal field, I can help you or your company evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.
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