MIAMI BUSINESS LITIGATION: CONTRACT “LIQUIDATED” DAMAGES

Liquidated damages are determinable with exactness from the cause of action as pleaded by a mathematical calculation or by application of a rule of law. Boulos v. Yung Sheng Xiamen Yong Chem. Indus. Co., 855 So.2d 665 (Fla. 4th DCA 2003). Many contracts contain a liquidated damage provision that attempts to ascribe an automatic amount of damage owed to the non-breaching party in the event of a breach. RKR Motors, Inc. v. Associated Unif. Rental & Linen Supply, Inc., 995 So. 2d 588 (Fla. 3d DCA 2008) (“A liquidated damages provision is a clause in a contract that determines in advance the measure of damages in the event of a contractual breach.”). Florida law permits these types of provisions. Goldblatt v. C.P. Motion, Inc., 77 So. 3d 798 (Fla. 3d DCA 2011) (“Florida law is well settled that the parties to a contract may stipulate in advance the amount that is to be paid or retained as liquidated damages in the event of a contract breach.”). Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Liquidated damages provisions are not always enforceable. To be enforceable, a liquidated damages clause must satisfy two conditions:

First, the damages consequent upon a breach must not be readily ascertainable.

Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages.

Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991).

The test for determining whether damages were readily ascertainable is construed at the time the parties entered the contract. Mazzini Trading, Ltd. v. Quality Yachts, C.A., 2013 WL 2367822, at *3 (S.D. Fla. May 29, 2013). This can often be a question of fact. Id. For example, in Goldblatt, 77 So. 3d 798, the court determined damages were ascertainable at the time the parties entered the contract because the contracting parties had significant experience in the industry. The court arrived at its conclusion even though the parties stipulated in the agreement that the liquidated damages provision results from the parties’ inability to determine damages. Id.

The damages sum stipulated in the liquidated damages provision cannot be grossly disproportionate to the actual damages because the law seeks to discourage penalty clauses. Action Orthopedics, Inc. v. Techmedica, Inc., 759 F. Supp. 1566 (M.D. Fla. 1991). (“Whether the sum stipulated in a contract to be paid in the event of a breach will be considered a penalty or liquidated damages is a question of law for determination by the Court.”). Courts look to the facts and circumstances of the case at the time of the breach to determine whether the liquidated damages provision justly compensates the non-breaching party. North Beach Investments, Inc. v. Sheikewitz, 63 So.2d 498 (Fla. 1953) (“The prime factor in determining whether such sum is a penalty or a forfeiture is whether the sum named is just compensation for damages resulting from the breach.”). In essence, the second condition is a matter of equity. Hutchison v. Tompkins, 259 So.2d 129 (Fla. 1972) (“The better result… is to allow the liquidated damage clause to stand if the damages are not readily ascertainable at the time the contract is drawn, but to permit equity to relieve against the forfeiture if it appears unconscionable in light of the circumstances existing at the time of breach.”). RKR Motors, Inc. v. Associated Unif. Rental & Linen Supply, Inc., 995 So. 2d 588 (Fla. 3d DCA 2008) is a useful example. In RKR Motors, Inc., the court refused to enforce the $102,000 liquidated damages provision because that actual lost profits were only $10,437. The court determined an award of about ten times the actual losses would be grossly disproportionate to actual damages. Id.

Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.