Incentive-ize Don’t Penalize; Liquidated Damages under New York Law


By including a liquidated damages clause when negotiating a contract, parties can estimate the amount of damages to serve as a remedy in the event of a breach.  This can be a helpful legal tool that limits litigation over the issue.  Furthermore, liquidated damage clauses are often designed to address very specific types of breaches or establish a gradient of damages based on the degree of a breach. However, drafting and enforcing liquidated damage clauses can become tricky when it comes to New York.

Contrary to what the “liquidated damages” name suggests, it provides a reasonable pre-determined damages award, adding greater insurance, predictability, clarity, and above all deterrence value to a contract. Such clauses can guard against delay in performance, outright failure to perform, and a variety of other breach scenarios. Moreover, the value of the damages clause does not have to be an accurate portrait of what “actual” damages would be upon breach. They need to be a reasonable approximation of harm suffered, they need to be specific and/or set out a specific formula, and they should not seek to penalize the breaching party.  Read more on liquidated damages clauses here.

The Uniform Commercial Code

The Uniform Commercial Code, a legal framework created to unify sales and commercial transactions law for all 50 states, provides that parties may choose between remedies if multiple remedies are described in the contract.  The parties also do not need to use definitive language to ensure this right and all other contractual remedies such as liquidated damages are considered optional, unless the contract lists a remedy as exclusive.

Moreover, the UCC supports liquidated damages clauses and provides guidelines as to how to draft them.  It suggests that the parties should consider a) the anticipated or actual harm caused by the breach; b) the degree of difficulty in proving loss; and c) the burden of employing other remedies, when formulating the clauses.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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