When someone breaches a contract, the contract may provide for “liquidated damages” in a set amount or to be calculated in a certain way.
The most common example of a liquidated damages clause is in many real estate contracts; the contract will provide that if the buyer breaches the contract, the seller can keep the deposit as liquidated damages.
The law in Florida favors liquidated damage clauses. The reason is, both parties have agreed at the time of the contract what the damages are; this minimizes problems of proof and calculating damages.
Liquidated damages clauses, though, are subject to some limitations; they can’t be ‘punitive’ or punish the breaching party; they must be ‘reasonable’. What is reasonable or punitive can be tricky; the Florida Supreme Court has considered a liquidated damages provision of ten percent of the sales price as reasonable, here:
Lefemine v. Baron
Nonetheless, the court did disallow the liquidated damages provision. Why? Because the contract allowed the seller the choice of either liquidated damages or suing under the contract for actual damages. The court stated:
The reason why the forfeiture clause must fail in this case is that the option granted to Baron either to choose liquidated damages or to sue for actual damages indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach. The buyer under a liquidated damages provision with such an option is always at risk for damages greater than the liquidated sum. On the other hand, if the actual damages are less than the liquidated sum, the buyer is nevertheless obligated by the liquidated damages clause because the seller will take the deposit under that clause. Because neither party intends the stipulated sum to be the agreed-upon measure of damages, the provision cannot be a valid liquidated damages clause
What’s the lesson here? If you are going to have a liquidated damages clause, do not provide an alternative remedy of bringing suit for actual damages.