Liquidated Damages Clauses in Michigan Business Contracts

In a contract, a liquidated damages clause simply limits the amount of damages that one party to the contract will be liable for in the event that they breach the contract or somehow cause harm to the other party to the contract. This type of clause is appropriate when the circumstances are such that it would be difficult to determine how much the actual damages suffered actually are, or if the damage amount would be purely speculative in nature.

In that kind of case, the parties can stipulate in their contract what the amount of damages will be. This type of stipulation will be enforced by Michigan courts so long as the amount agreed upon by the parties is reasonably related to the actual damages that might have been expected for a breach or other harm.

Michigan courts have been enforcing liquidated damages clauses for a long time. For example, in one 1908 case, the Michigan Supreme Court stated: “In cases where it is difficult to accurately determine the damages which one party may suffer by the failure of the other to perform his contract, the parties themselves may agree upon such sum as in their judgment will be ample compensation for the breach.”

However, Michigan courts will not enforce a liquidated damages clause if the amount of damages can be readily determined or if the clause appears to impose a penalty instead of truly trying to fix a reasonable damage amount.

Having an enforceable liquidated damages clause can be a real lifesaver if you have been sued and there is a potential for a large damage award. These kinds of clauses can also cut the other way as they can allow a party to recover damages in a specified amount even if their true damages are not as much as the damages provided for in the liquidated damages clause.

Either way, it is imperative that an experienced Michigan business lawyer review your contracts to make sure that any liquidated damages clauses will be to your benefit should you need to rely on them in the future.

Please feel free to contact Michigan business and litigation lawyer Michael J. Hamblin for more information on how he can help you with your legal needs.