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What are “Liquidated Damages” in San Diego?
A provision for liquidated damages is a way to specify damages in the absence or inability of actually calculating damages, or when such damages would be difficult to calculate. The advice and counsel of a good corporate lawyer is needed if you have a contract with a liquidated damages clause or if you want to insert one in your contracts. Here is some information of liquidated damage clauses in San Diego.
San Diego Corporate Law: What is a Liquidated Damages Clause?
In general, if you are in the unfortunate position of having breached a contract, you can be sued and, if you lose the trial, you will be required to pay “damages.” Generally, the measure of damages for breach of contract is “the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom…” See Cal. Civ. Code § 3300. Lawyers and judges generally say that the damages should “make the aggrieved party whole.”
Many times, the damages are “easy” to calculate. If you promised to deliver 10,000 pounds of oranges at 40 cents per pound and you fail to deliver, the damages are what it cost the buyer to buy oranges from a replacement seller — maybe 42 cents per pound. The buyer will be entitled to that extra 2 cents per pound and other costs such as extra delivery charges, possible lost profits, etc.
However, some contracts involve subject matters — like non-disclosure of confidential information — that do not lend themselves to easy and mathematical proof in a courtroom. In those contracts, the parties can agree to what are called “liquidated damages.” Liquidated damages are an agreed-upon amount that will be the damages if there is a breach. In the oranges example above, the parties might have agreed that the liquidated damages would be $1,000. Then, the buyer would not have had to prove in court the exact amount of the damages. However, such a clause is probably not allowed for a contract with respect to the sale of oranges.
Under California law, liquidated damages are allowed only when, at the time of contracting, it is “impracticable or extremely difficult to fix the actual damage.” See Cal. Civ. Code § 1671.
San Diego Corporate Law: Invalidating a Liquidated Damages Clause
Even though the parties might have agreed to a liquidated damages clause, often during the course of litigation, one party to the contract will attempt to challenge the liquidated damages clause. Under Cal. Civ. Code § 1671(b), one can attempt to invalidate a liquidated damages provision if one can prove that the amount was intended by the parties to impose a penalty or if the parties’ chosen amount is outside the range of reasonableness (either too high or too low), in light of the circumstances known at the time of the estimate. One can prove that the amount of damages chosen bears “no reasonable relationship” to the actual damages that the parties could have anticipated. See Ridgley v. Topa Thrift & Loan Assn., 73 Cal.Rptr.2d 378 (Cal. Supreme Court 1998). The California Commercial Code has a similar provision stating that a “term fixing unreasonably large liquidated damages is void as a penalty.” Cal. Comm. Code, § 2-1671.
Contact San Diego Corporate Law
If you would like more information about liquidated damages clauses, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to help draft and review any sort of business contract or agreement needed by your San Diego business. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard can be reached at (858) 483-9200 or via email.
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