Of course, you would not enter a contract agreement that you did not believe would be honored. Still, in the business world, nothing is guaranteed, so well-written contracts are a must for any project. The fact is, sometimes contracts get breached.
A contract breach can happen for any number of reasons. For example, a party may encounter unexpected difficulties that make the fulfillment of obligations impossible. Or perhaps one of the parties decides that the terms of the contract don’t? provide enough incentive to follow through on the deal.
If a party with whom you have an agreement should breach the contract, you could suffer serious economic consequences. This is especially true if you have obligations to other parties that depend on the services offered by the party that breached the contract.
And this is why every contract should have what is known as a liquidated damages clause. Essentially, a liquidation clause contains a reasonable estimate of the damage that would be in occurred in the event a contract is breached.
But estimating liquidated damages can prove tricky, and there are only certain circumstances in which the clause should be applied. These circumstances include:
- If it’s difficult to prove the loss.
- If it is difficult to quantify the damage done by the breach.
- If the use of the clause offers the only possible remedy.
Preparing a liquidated damages clause is difficult because it involves tracking and anticipating the damage caused by an event that has not yet transpired. The damage could even be different depending on the time in which the breach occurs. Still, such a clause offers protection against losses and the potential for protracted litigation.
If you are preparing a contract, you may want to consult with an experienced business law attorney. An attorney can help you formulate a reasonable estimate of potential damages. Including an accurate estimate of potential damages in a contract can help provide you with assurance as you proceed with your project.