Koncision » “As Liquidated Damages and Not As a Penalty”

Contract parties are free to structure their relations as they see fit, but within limits set by statute or by the courts. That raises the question, does it make sense to state in a contract that you’re complying with a given legal requirement?

… To explore this, I considered the phrase as liquidated damages and not as a penalty, which obviously enough occurs in provisions in which the parties, instead of having actual damages determined in the event of a dispute, specify what damages a party is to pay on breach of a given obligation. … I recommend that you do more than just trot out as liquidated damages and not as a penalty. It’s sufficiently rote and terse as to constitute jargon. Because drafters and their clients don’t give it much thought, courts would be entitled not to pay much attention to it either.

Here’s a more meaningful way of saying the same thing:

Acme acknowledges that the actual damages likely to result from breach of this section X are difficult to estimate on the date of this agreement and would be difficult for Widgetco to prove. The parties intend that Acme’s payment of the Liquidated Damages Amount would serve to compensate Widgetco for any breach by Acme of its obligations under this section X, and they do not intend for it to serve as punishment for any such breach by Acme.

By the way, is this an issue outside the U.S.?

Yes, it is. The legal position in Ireland is exactly the same.

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