Recently, we discussed the concept of liquidated damages in breach of contract cases. Liquidated damages are something which every business owner should know about. Nearly every business owner will come across these clauses at one point or another. As we know, liquidated damages are a fixed amount of compensation which is mutually agreed at the outset of a contractual agreement. In the event of a breach, these fixed damages may be used to compensate the non-breaching party. Several principles inform how courts view these damages and determine whether or not they should be upheld and enforced.
In this post, we will discuss the concept of penal damages in liquidated damages clauses. Just like the concept of liquidated damages, the concept of penal damages is something every owner should be familiar with. Let’s explore this idea in a bit of detail.
Penal Damages are Excessive Liquidated Damages
As we’ve discussed, liquidated damages represent compensation which is meant to make the non-breaching party whole in the event of a breach. In other words, they are meant to be a reasonable approximation of the damages actually incurred as a consequence of a breach. But, in some cases, the liquidated damages exceed the actual damages suffered by the non-breaching party; more precisely, they exceed the reasonable approximation of what the non-breaching party may actually suffer. The portion of the liquidated damages which exceeds the reasonable approximation of what the non-breaching party actually suffers is the penal damages of the clause. In other words, penal damages are excessive liquidated damages.
Penal Damages vs. Punitive Damages
Penal damages may be expressed in different ways. Some liquidated damages clauses, may not be specified or separated out from the normal amount which is supposed to represent the damages suffered by the non-breaching party. In other contracts, they may be listed separately, and are intended expressly to represent a penalty or form of punishment to the breaching party. In this way, penal damages mirror punitive damages; the difference between these two types of compensation, however, is the fact that punitive damages refer specifically to damages recovered in tort cases. In rare cases, a court may impose a punitive damage in a tort case in order to discourage similar behavior from others in the future. This only happens when the behavior in the tort case was egregious.
Unlike punitive damages, however, penal damages are basically always held to be void by courts. Punitive damages may be rare, but they are awarded from time to time. Penal damages are almost never awarded. And the reason for this is because they simply run against the basic principle which guides contract law: the principle of making the non-breaching party “whole,” or putting the non-breaching party in the position which would exist if the breach hadn’t occurred.
Penal damages go above and beyond the damages actually incurred by the non-breaching party. The impose a penalty on the breaching party simply because the contract was breach; in effect, they make the breach itself something which inflicts damage, rather than something which can potentially lead to damages suffered by the non-breaching party. Courts regard these excessive damages are essentially unenforceable.
Reach Out to Trembly Law for Additional Information On Breach Of Contract Damages
Penal damages are nearly always void, but as we’ve seen, liquidated damages can be upheld. As a business owner, you will probably see both of these types of clauses during your career. If you’re preparing a contract and need guidance, or you’d like to learn more about contract formation, reach out to the experts at the Trembly Law Firm. Give us a call at(305) 431-5678 and one of our professionals will respond immediately.