Liquid

Happy Friday, everyone. For those of you sick of watching tv coverage of T.S. Fay and are looking forward to a reprieve, please be advised that you will get no such thing. There are two more disturbances out in the Atlantic, the closest of which appears to be ripe for significant development over the weekend. Just what the doctor ordered. Details are at www.weatherunderground.com.

On to the news.....Today, liquidated damages provisions. Now, I'm sure most of you are thinking that this has nothing to do with you and something that sounds so strange has no bearing upon you or your life. I'm willing you bet you are wrong. Take a look around at many of the same documents I referenced in my last blog entry- (contracts for goods and services, mostly). Many of those same documents will have a liquidated damages provision, which provides for an exact amount of money to be paid by a party breaching the contract to the party that didn't.

Yes, these things are legal but they are surrounded by a fuzzy halo of qualifiers and requirements that are entirely dependent upon the language of your contract and your particular circumstances. For instance, a liquidated damages clause is inserted in agreements (in theory, anyway) to cover the costs or best guess-timated costs to compensate the non-breaching party. This is supposed to save time and money figuring out what the actual costs would be and allow all the parties to move on as quickly, as possible.

Such clauses cannot be penalties. You cannot have a provision that provides for you to pay $1,000,000 for terminating an agreement in which you are only buying $50,000 worth of merchandise or services. It has to be proportionate to the actual expenses involved and what the circumstances of your situation or industry properly value the loss to be sustained.

The reality, there tends to be a lot of fighting about whether a particular clause is reasonable or constitutes an illegal penalty. It helps to review these clauses in advance of signing an agreement and getting some written clarification from the other contracting party as to what the basis for calculating this number was. Such information can be very useful if your agreement goes south later on.

Have a great weekend!