Liquidated damages clauses are sometimes included in contracts as a predetermined amount of damages in the event of a breach by one or both parties. These provisions are enforceable under certain circumstances. If the provision is so unreasonable as compared to the actual damages suffered by the nonbreaching party, however, the clause might be deemed a penalty and therefore be unenforceable. If a party to your contract breached the agreement and you are subject to a liquidated damages clause, contact an experienced New York breach of contract attorney today for guidance.
How does this play out in real life scenarios? Here is an example. According to a recent New York appellate court ruling, a breach of contract lawsuit against pop star Beyoncé will proceed. In the lawsuit, a video game company alleges that the singer breached their agreement to create a dance simulation game using the star’s image and name. Beyoncé reportedly backed out of the contract after the company had already invested millions of dollars in the development of the game. The firm is now suing for more than $100 million in damages.
What happens if the contract between the video game company and the singer contains a liquidated damages clause? The company can challenge the clause and seek additional damages, in which case a court will make the following assessments:
- Is the clause a liquidated damages provision or is it a penalty?
- Does the amount of the liquidated damages reasonably represent the probable loss to the company?
- Is the actual loss to the company difficult or impossible to determine?
- Is the amount of the liquidated damages plainly or grossly disproportionate to the probable loss?
The burden of proving that the liquidated damages provision is actually a penalty would fall on the company.
Contact an experienced New York business litigation lawyer today for more information. Call our office at (888) 497-3410 for a free consultation.