MIAMI BUSINESS LITIGATION: VALID LIQUIDATED DAMAGES PROVISIONS IN CONTRACTS

Parties to contracts sometimes include a “liquidated damages” provision, i.e., a certain financial amount in the event of a triggering event specified in the contract. Liquidated damages provisions seek to ensure compliance with the parties bargain when damages would be difficult to determine from the parties’ vantage when they sign the contract. As Miami’s Third District Court of Appeal explained in Gables v. Choate, 792 So.2d 520 (Fla. 3d DCA 2001), “Florida law recognizes that where damages are not clearly ascertainable, parties to a contract may agree to a predetermined amount of damages that will flow from a breach of the contract.” Under Florida law, “[l]iquidated damages arising from breach of contract are appropriate when (1) damages from the breach of are not readily ascertainable, and (2) the sum stipulated is not grossly disproportionate to the damages reasonably expected to follow from the breach.” Resnick v. Uccello Immobilien GMBH, Inc., 227 F.3d 1347 (11th Cir. 2000). 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.

Florida law does not permit a liquidated damages clause in a contract that operates as a “penalty,” i.e., a mere punitive measure. An excessive liquidated damages provision, however, is not necessarily a penalty. In Secrist v. Nat’l Service Industries, Inc., 395 So.2d 1280 (Fla. 3d DCA 1981), the appellate court explained that “[t]he fact that the liquidated damages may be excessive at the time of breach does not lead to the conclusion that the liquidated damages clause is a penalty and therefore not enforceable.” In its Resnick decision, the United States Court of Appeals for the Eleventh Circuit explained “liquidated damages are inappropriate when they serve only to punish the breaching party.” Resnick explained that where a liquidated damages provision contains “two separate and distinct parts,” any one of which is excessive, a court may properly enforce the provision found not to be excessive.

Florida courts have considered situations where a settlement agreement contains incorporates a trigger provision requiring the full amount of a default or consent judgment, and whether such a provision may be determined to be an unenforceable penalty, as opposed to a valid liquidated damages sum. For example, Florida’s Fifth District Court of Appeal evaluated this issue in Crosby Forrest Prods., Inc. v. Byers, 623 So.2d 565 (Fla. 5th DCA 1993). There, the plaintiff sued defendant for nonpayment of a contract for goods sold in the amount of $89,922.65. The parties thereafter signed a settlement agreement containing a stipulation that defendants “owed [plaintiff] $93,899.91”, i.e., an extra amount for attorneys’ fees, costs, and interest. As an incentive to timely pay under the settlement agreement, the defendants were required to “pay [plaintiff] $80,000” in a series of “installments.” The contract provided, however, that “[i]n the event of a default of any payment” the court would have the authority to “immediately … enter judgment against [defendants] for any sums remaining unpaid on the amount stipulated to be due,” i.e., the stipulated amount of $93,899.91. Unfortunately, the defendants made only three payments under the settlement agreement, but failed to make the fourth payment. On appeal, the defendants argued that “the portion of the [settlement agreement] requiring [defendants] to pay the remaining balance of the original $93,899.91[,] rather than the balance of the $80,000,” was an unenforceable “penalty.” They contended that “damages for the breach” of the settlement agreement were “the agreed upon amount of $80,000 less payments made,” which was “readily ascertainable,” and therefore the higher stipulated amount was improper. The District Court of Appeal in Byers rejected the defendants’ argument and reversed the trial court’s vacatur of the liquidated damages award. Byers held that the parties lawfully bargained for the higher amount, explaining that “the larger amount payable upon default represents a legitimate amount … [that] is not a subterfuge for usury or an unconscionable premium.” The appellate court explained that this did not violate any public policy, and instead “enforcement of such a provision” could “encourage settlement of lawsuits.”

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.