(April 5, 2012): Your business may often enter into contracts for services, or a lease contract for machinery or for space. These contracts are usually for a certain term or length of time. Halfway through the term, you decide that you are not receiving what you were promised when you initially entered into the contract. Unfortunately, your complaints fall on deaf ears. Finally you are fed up and cancel the contract.
Before canceling (or really, entering into) a contract, beware of any “liquidated damages” provisions that may apply. You may be liable for damages for canceling the contract and your company could take a bath, or in other words suffer a serious monetary loss, because of a “liquidated damages” clause.
Leasing and service contracts often contain a liquidated damages clause that takes effect if you terminate the contract without what the other party considers a valid reason. Liquidated damages are a set amount of payment for damages to the other party for your action of terminating the contract before it ends. Such a clause may state that you agree it is impracticable and difficult to determine the damages the other party will suffer if you terminate the lease or contract before it ends. The clause may also provide factors to determine the damages. Factors may include expenses relating trying to lease the equipment or premises to another person, potential loss of income, and expenses incurred to provide the services to you or to provide services to another person.
Are Liquidated Damages Enforceable in Court? If the monetary figure is too large, courts may rule the liquidated damage clause is simply punitive - a penalty provision - and therefore unenforceable. Many times, you may be able to negotiate the figure down or eliminate the clause through negotiation before signing the contract. It is important, however, to carefully read each provision of a contract before entering into it.
As always, if you want to cancel a contract before it ends, consult with your attorney to determine your obligations, potential adverse effects and the best ways to end the contract.