Business arrangements could involve several parties signing contracts. A Texas restaurant entrepreneur may sign deals with various service providers to deliver food, beverages, and other supplies. When someone breaches a contract, a business could lose money. How much money could be lost might be unknown. So, a contract may include a “liquidated damages” clause. Enforcing the clause might involve legal action.

Understanding liquidated damages

Liquidated damages involve the parties to a contract agreeing to pay a pre-specified sum to cover intangible or challenging-to-define losses. A business might lose sales when a product doesn’t appear on its shelves, and a distributor’s lateness might cause such delays. How much the company would sell during the days the product was unavailable might be challenging to prove, but the liquidated damages clause could cover the losses.

A business might experience other losses when a party breaches a contract. Damage to a reputation could cause loyal customers to depart and diminish the ability to procure new ones. Putting an accurate figure on the loss might prove challenging, but the agreed liquidated damages figure may cover the costs.

Suing a party for liquidated damages

Breaching a contract involves not meeting the obligations stipulated. If someone breaches a primary duty, such as delivering products or services, what stops the person from refusing to honor the liquidated damages provision?

Business litigation may commence forcing a party to pay liquidated damages. The plaintiff should realize that amount sought cannot be punitive. The goal does not involve penalizing the other party but receiving compensation for losses.

Disputes might arise over the purported breach. The other party may refuse to pay liquidated damages by claiming the contract was never breached. A lawsuit could be the only way to address the dispute.