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What Are Liquidated Damages in Ohio Contracts?
Ohio contract laws require the party that breaches a contract to pay a predetermined amount to the non-breaching party as exclusive compensation for failing to meet their part of the bargain. Business lawyers in Ohio say the parties to a contract typically negotiate a liquidated damages provision into a sale of goods or service agreement under some circumstances.
An example is where estimating the damages the non-breaching party may incur if a specific term is violated may be challenging. These rules are captured under the Standard Clause, which comprises important drafting tips and explanations.
What Does the Law Say About Liquidated Damages?
Contract formation and enforcement attorneys in Cleveland explain that courts in Ohio typically follow the well-known principle of interpreting contract language to carry out the parties’ intent, especially when the language is clear.
This especially happens in commercial settings, where courts consider each party to have an equal footing, can secure counsel, and understand sophisticated business principles. Courts often uphold language in commercial contracts unless it is contrary to public policy or statutory law.
As a result, commercial parties often have a lot of leeway in allocating the risk of a particular deal. One approach to allocating risk is inserting a “liquidated damages” provision into a contract. When drafting business contracts, it’s advisable to consult widely with Cleveland contract formation and enforcement attorneys to help you incorporate the clause.
How Are Liquidated Damages Calculated?
Determining the rate for liquidated damages can be challenging, and every contract will be different, depending on the case specifics. However, there are general principles that apply when calculating the amount. Broadly, parties to a contract should:
- Consider the position the project owner would be in if the project is not delayed
- Compare that to the position the project owner would be in if the project is delayed
- Determine the appropriate amount to compensate the project owner in case of a delay to reinstate them to the position they would be if the project were not delayed.
Some factors that may influence the costs of liquidated damages include, but are not limited to:
- Storage costs
- Loss of revenue
- Rental costs
- Supply chain disruptions
- Equipment costs
These costs are deducted from the contractor’s project price, which could affect their return on investment. Both parties must arrive at a mutually agreeable set of terms when creating the clause and assign acceptable levels of responsibility to reduce the potential of litigation if a dispute arises.
Guiding Factors When Drafting a Liquidated Damages Clause
Contract formation and enforcement attorneys in Ohio say parties to a contract should consider various factors when drafting the liquidated damages clause. Some possible ones are the following:
- Any loss from breach of the contract
- Loss of anticipated profits
- Additional fees payable to the contract superintendent
- Additional fees payable to other consultants and advisers
- Additional costs associated with site offices or temporary arrangements for the extended period
- Any loss of income from residents or tenants
- Additional supplier or staff costs for the project extension period
- Additional cleaning or security costs for the extended period
- Additional insurance costs
- Additional costs of confirming continuing compliance with statutory obligations
- Any loss of anticipated income from government or other time-specific sources.
Most contractors require a cap on liquidated damages, often between 5% and 10% of the contract sum. However, the cap should not be too constrained as to make the damages disincentive to delay.
What Are the Benefits of a Liquidated Damages Clause?
A liquidated damages clause provides security and predictability, especially in construction contracts. Legal experts say it is a great way to hold contractors accountable without penalizing them. The clause also helps ensure a project is completed within a reasonable time without incidental damages.
If the clause is breached, the aggrieved party can determine damages without the tedious process of proving actual damages. That way, they have some form of insurance and also enjoy the following benefits:
- Increased assurance that the other party will make every effort to complete the project in time
- Reduced risk for contractors to breach the contract by negotiating and realizing timelines, especially when backed by historical benchmarks
- Faster resolution of a stalemate compared to the lengthy and costly litigation process that entails calculating actual damages.
When Are Liquidated Damages Enforceable?
Ohio business attorneys explain that liquidated damages are not automatically enforceable. Courts may refuse to enforce them when they are disproportionate to anticipated damages and constitute a penalty. Courts must conduct the proportionality assessment based on the existing circumstances at the time of the contract.
A crucial factor to consider is whether the damages are difficult to ascertain at the beginning of the contract. If they are not, the provision for liquidated damages will be enforced as long as the forecast of expected damages was reasonable.
If the damages at the time of the contract are easy to determine, such as when they are based on lost profits, the court may conduct further investigation and not enforce it if the liquidated damages are grossly disproportionate to or unconsciously excessive than the actual damages. Cleveland contract formation and enforcement lawyers can provide more insights.
A Skilled Business Attorney Provides Legal Insights into Liquidated Damages Clauses
A liquidated damages clause is crucial in Ohio contracts because it cushions the principal party from losses from violating the agreement. Some legal and procedural requirements must be fulfilled for a party to qualify for liquidated damages. Consult widely with experienced contract formation and enforcement attorneys in Cleveland for more guidance.
At the Watson Kuhlman, LLC, law firm, we have dedicated business lawyers who can evaluate your contract and help you draft the liquidated damages clause. We can also help you handle other legal matters affecting your business. Call us at 216-208-7858 to schedule a FREE consultation.
