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What to know about liquidated damages

On Behalf of | Aug 3, 2021 | Business & Commercial Litigation

Although most people act in good faith after signing a contract, it’s possible that the deal could be breached at some point after it goes into effect. Therefore, it’s not uncommon for contracts to include clauses giving a breached party the right to seek liquidated damages. As a general rule, liquidated damages are designed to help Massachusetts companies minimize any financial losses that a breach might cause.

Liquidated damages clauses aren’t always enforced

It’s important to note that a party to an agreement that includes liquidated damages won’t necessarily have to pay them if the contract is breached. This is because they are not designed to be punitive in nature. Instead, they are designed to help estimate actual damages in the event that it’s difficult or impossible to come up with an exact calculation.

Disputes are often resolved through arbitration

Generally speaking, any disputes related to the number of liquidated damages that a party is entitled to are resolved in arbitration. The arbiter will help the parties determine what the victim of a breach of the contract likely lost as a result of the other party’s actions. In some cases, the amount that a party is owed for a breach of contract is negotiated before the contract is executed. In such a scenario, there may be no need to take a case to arbitration.

Is there a better way to resolve a conflict?

Liquidated damages are usually included in a deal when there is no better way to protect a party from a breach of contract under business law. An attorney may be able to provide more insight into whether such damages are appropriate in any purchase agreement.

If you are the victim of a breach of contract, it may be possible to obtain compensation. In the event that the breach was a willful act, you may have grounds to seek punitive damages in addition to liquidated damages. Breach of contract cases may be resolved through mediation, arbitration, or litigation.