This article reviews the controlling authority governing the drafting and enforcement of liquidated damages provisions in California.
Historically, liquidated damages provisions were disfavored because courts considered them penalty clauses and, frequently, refused to enforce them.
Liquidated damages provisions are not used in every contract, but they may make sense in certain instances.
are a means of compensation for the breach of a contract.
Often, liquidated damages clauses are found in real estate transactions and other contracts where a specific dollar amount can be hard to determine because of changing circumstances.
Real estate contracts often contain "liquidated damages" provisions because damages for breach of contract can be difficult and costly to ascertain, and because these provisions can provide the parties added incentive to perform.
In deciding whether to use a liquidated damages provision and in drafting one, care should be taken so that a court, potentially years later, does not find that the provision is a penalty and, therefore, unenforceable.
As such, the parties to the contract can decide on an amount that will need to be paid if either breaches and they can include details about that amount right in the contract.