Contract Tip - Liquidated Damages

A liquidated damages clause is a provision in a contract that fixes a pre-negotiated amount of damages that will be due to one party if the other party breaches the contract. For example, if a home buyer gives the seller a $1000 deposit and later the home buyer decides not to purchase the seller’s house, the contract may state that the seller gets to keep the buyer's $1000 deposit as liquidated damages. A termination fee for canceling your cell phone contract early is another example of liquidated damages.

Liquidated damages will be enforced if:

1) the actual amount of damages is uncertain or difficult to estimate at the time the contract was formed, and

2) the amount of liquidated damages is a reasonable forecast of the actual damages that would be suffered.

A liquidated damages clause will NOT be enforceable if it is designed as a "penalty." For example, assume a school contracts with a construction company to build a new playground, and the contract states that if the playground is not completed by the deadline then the construction company will have to pay the school $1000 per day for each day the project is late. This will be an invalid liquidation clause because it is highly unlikely the school will lose $1000 per day due to the playground construction being late. This clause is not a reasonable forecast of damages, and it would therefore be viewed as a penalty. As a result, a court would not enforce this provision against the construction company.

Contract tip - Waiver

Waiver occurs when there is a condition in a contract that protects one of the parties and the protected party voluntarily gives up the protection of that condition.

For example, your friend offers to sell you their car for $1000 on the express condition that the car is “undamaged.” This condition is meant to protect you (the buyer) from buying a damaged car.

Assume further that when you see the car, you discover it has a large dent on the driver’s side. Since the “undamaged” condition has not been met, you do not need to go through with this contract.

However, if you still really want the car, you can choose to waive the condition and follow through with the contract, because the condition was meant to protect you.

It is a good idea to include a “waiver” clause in a contract, which states that a waiver of one condition is not to be construed as a waiver of all conditions. This will prevent the other party from trying to claim that you waived all of your protections just because you were nice enough to waive one.

If you need help in drafting or reviewing your contracts, please contact us and speak to one of our professionals.

Contract tip – Consideration

In order for a contract to be valid, there must be consideration. Consideration is the value exchanged between the parties to a contract. In other words, each party to the contract expects to obtain some benefit in the contractual deal in exchange for giving up something else.

For example, if you and your friend agree that your friend will mow your lawn for $50, this is a valid contract with valid consideration. You are getting the benefit of a nicely-mowed lawn in exchange for giving up $50, while your friend gets $50 in exchange for expending time and effort to mow your lawn.

On the other hand, if you and your friend agree that your friend will mow your lawn for $0, there is no valid consideration. Even if you make your friend sign a professional-looking document agreeing to mow your lawn for free, this would not be a valid contract because it lacks consideration. Your friend still might mow your lawn out of sheer kindness, but your friend is under no legal obligation to do so.

Always ensure your contracts contain valid consideration. If you want to be certain your contracts contain all the proper elements, please contact us and speak to one of our professionals.