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In a contract, parties agree on the performance required by each of them.
When one party does not live up to the deal, there is a breach. But how do we get from identifying the fact that damages are owed to actually paying or receiving that calculated amount of money?
When most breach of contracts cases occur, the damages that are awarded are based on the actual financial loss incurred by the party who suffered the breach. For example, if Joe is renting an apartment from Ann for 0 a month and then Joe breaks the lease and Ann can't find a new tenant for a month, then Ann has suffered 0 in damages and that would be what Joe has to pay.
Sometimes, however, it can be difficult or impossible to calculate how much a breached contract would cost.
The phrase “liquidated damages” refers to the agreement between parties at the time of contract formation about what the consequences of a breach will be.
For example, Wisconsin law looks at three things when determining whether a liquidated damages clause is actually a penalty: 1. Of these, the most important factors are the degree of difficulty in determining actual damages and whether the damages are grossly disproportionate to the actual or anticipated harm.
A penalty arises when a party is clearly forced to pay more upon breach than they would ever owe as actual damages. If a party can’t or doesn’t want to perform, they shouldn’t have to.
Although the law varies by state, here is the Georgia statute on contract damages as an example: “Damages recoverable for a breach of contract are such as arise naturally and according to the usual course of things from such breach and such as the parties contemplated, when the contract was made, as the probable result of its breach.” What this basically says is that upon a breach, the party damaged by that breach must establish what its actual damages are, as defined by this statute.
For example, if a meeting planner cancels a meeting, what is the actual economic impact on a hotel? If you’ve been injured by a breach, you need to first establish how much you’ve been damaged by that breach, put a dollar amount on it, then negotiate a settlement or file a lawsuit.