Presenting a live 90-minute webinar with interactive Q&A Negotiating Enforceable Liquidated Damages Clauses in Business Contracts Avoiding Enforceability Pitfalls With Carefully Drafted Provisions TUESDAY, JUNE 2, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Rebekah R. Conroy, Shareholder, Walder Hayden , Roseland, N.J. Shepard Davidson, Partner, Burns & Levinson , Boston Craig R. Enochs, Partner, Reed Smith , Houston Michael J. Pike, Attorney, Pike & Lustig, LLP , West Palm Beach, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Negotiating Enforceable Liquidated Damages Clauses in Business Contracts Craig Enochs June 2, 2015
Liquidated Damages - Purpose What are Liquidated Damages: “[T]he fundamental purpose of a valid liquidated damages provision is to provide a reasonable measure of compensation in the event of a breach where, at the time the provision is agreed to the damages are indeterminable or will be otherwise difficult to prove. ” - Williston on Contracts, § 65:3 (4 th Ed.) 6
Liquidated Damages - Purpose What are Liquidated Damages: Liquidated damages are a variety of actual damages — not special, consequential, incidental, or punitive damages. Liquidated damages provisions effectively allow the parties to determine the amount of damages without going through the potentially lengthy and burdensome process of dispute resolution and proving actual losses incurred due to breach. 7
Liquidated Damages - Purpose Commonly Used to Anticipate and Mitigate: • Delay scenarios • Failure to deliver a product or service • Costly and time-consuming dispute resolution and fact-finding in the event of a breach 8
Liquidated Damages – Benefits • Saves Time and Money. • Agreeing at contract formation what a reasonable estimate of damages will be is faster and more efficient — both in negotiation effort and in any potential future dispute (i.e ., potentially takes an entire disputed issue off the table at a later date). • Negotiating a liquidated damages provision is cheaper — in legal fees and other transaction costs — than dispute resolution at a later date. 9
Liquidated Damages – Benefits • Reduces Uncertainty. • Prior agreement gives the parties a compensatory framework and defines the actions (or inactions) that will trigger a payment obligation. • Uncertainty and unknowns in statutory or case law increase the legal risk of damages determination at a later date — liquidated damages are an important tool for mitigating that risk. 10
Liquidated Damages – Benefits • Reduces Uncertainty (cont.). • The reduction in uncertainty allows for risks to be insured, or to be insured more quickly and at reduced expense. • Defaulting parties are more likely to pay dispute — liquidated damages without especially if setoff is incorporated in the mechanism that effectively accelerates any payment netting. 11
Liquidated Damages – Benefits • Bargaining Chip. • Liquidated damages provisions can be a powerful negotiating concession when seeking concessions elsewhere in the overall agreement. • Liquidated damages allow for tailoring the parties’ damages expectations to the deal in a way that cover damages could not. 12
Contact Information Craig R. Enochs Partner cenochs@reedsmith.com T: 713.469.3884 13
Caps/Limitations on the Amount of Liquidated Damages and Language not to Include Shepard Davidson Partner, Business Litigation Burns & Levinson LLP 617.345.3336 sdavidson@burnslev.com www.inhouseadvisor.com burnslev.com
Engaging Title How Deflategate is Impacted by Caps on Liquidated Damages and Language that Bruce Jenner Never would Use in a Liquidated Damages Provision 15
Physics and Liquidated Damages 16
Payment for Breach Clause If Celebrity appears promoting the Products of any Competitor … Celebrity shall repay to the Company any portion of the Endorsement Fee previously paid during the Term …. 17
Payment for Breach Clauses A Liquidated Enforceable damages provision A penalty clause Unenforceable 18
Liquidated Damages Prerequisite At the time the contract was executed, the liquidated amount must have been a reasonable estimate of the expected damages for the contemplated breach. 19
Penalty Provision Ramifications The Court will not reform a penalty provision Plaintiff will have to prove its damages (but may not be able to do so) 20
Penalty Provisions X and Y agree and acknowledge that, based on the information available to them at the time this Agreement is being executed, including but not limited to __________, the liquidated damages called for is a reasonable estimate of the probable loss that Y would suffer under the circumstances indicated. 21
Drafting Don’ts Don’t use the words Penalty, deterrent or anything that sounds like them Don’t use any language that could suggest the liquidated amount is greater than the actual damages expected Don’t use any language to suggest that damages would be easy to calculate at the time of actual breach 22
Liquidated Damages – Let’s Eat Cake! Knowing the law about liquidated damages may allow you to have your cake and eat it, too. 23
Enforceability of Liquidated Damages Clauses Rebekah R. Conroy, Esq. Walder Hayden P.A. (973) 992-5300 rrconroy@walderhayden.com
• Reasonableness of Clause at Time of Contract and at Time of Breach • Difficulty Calculating Actual Damages • Avoiding Perception of Liquidated Damages Clause as Penalty 25
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“ The time as of which the forecast of loss must be judged to be reasonable has traditionally been regarded as the time when the contract was made, not the time when the breach occurred .” E. ALLAN FARNSWORTH, CONTRACTS § 12.18 , note 5, at 301 – 02 (2d ed. 1998). “[ T]he modern trend is towards assessing reasonableness either at the time of contract formation or at the time of the breach. ” Wasserman's Inc. v. Middletown , 645 A. 2d 100 (N.J. 1994) The New Jersey Supreme Court offered the following observation in adopting the retrospective approach: “ Determining enforceability at the time either when the contract is made or when it is breached encourages more frequent enforcement of stipulated damages clauses.” Wasserman’s , 137 N.J. at 252. 27
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