Liquidated Damages
(Sale of Goods) Clauses

Summary

These liquidated damages clauses can be used in a sale of goods agreement to provide for liquidated damages in the event of a breach of the sale contract. The template includes practical guidance and drafting notes. Liquidated damages are damages agreed upon by the contracting parties at the time of contract formation and before any breach has occurred, to compensate the injured party in the event of a breach. Liquidated damages removes the non-breaching party's burden of having to establish with reasonable certainty the amount of its actual damages in the event the other party breaches the contract. Liquidated damages, however, are only available in limited circumstances, where at the time of contracting it would be difficult or impossible to calculate the actual damages that would result from a breach with any degree of certainty. Additionally, the liquidated damages stipulated in the agreement must represent a reasonable and fair attempt by the parties to calculate future damages and must bear a reasonable relationship to the damages that would likely result from a breach. The basic principle regarding the enforceability of the provision is that it must not be a penalty that punishes the breaching party. Rather, the provision must be intended to reasonably compensate the non-breaching party. With respect to liquidated damages in contracts for the sale of goods under the Uniform Commercial Code (UCC), damages for breach by either party may be liquidated but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or difficulty of otherwise obtaining an adequate remedy. Any term that fixes an unreasonably large amount for liquidated damages will be void as a penalty. UCC § 2-718(1). Accordingly, even if you can get the other party to agree to a draconian liquidated damages provision that favors your client but has no reasonable relationship to potential damages, such a clause will likely be deemed an unenforceable penalty by a trier of fact and, therefore, should be avoided. For further guidance, see UCC Damages and Remedies.