Agreements for Liquidated Damages in Connecticut: A Guide for Businesses

In Connecticut, agreements for liquidated damages are a common practice in various types of commercial contracts. However, it is important for businesses to understand what liquidated damages are, the legal requirements for them, and the potential risks and benefits of using them in their contracts.

What are Liquidated Damages?

Liquidated damages are predetermined amounts of money that parties agree to pay in the event of a specified breach of the contract. These damages aim to compensate the non-breaching party for the losses incurred due to the breach, without the need to prove the actual damages in court.

For example, if a construction company is hired to complete a project by a certain deadline and fails to meet that deadline, the contract may include a liquidated damages clause that requires the company to pay a predetermined amount of money to the client for each day past the deadline.

Legal Requirements for Liquidated Damages in Connecticut

In Connecticut, liquidated damages are enforceable if they meet certain legal requirements. According to Connecticut General Statutes § 52-236a, a liquidated damages provision must be reasonable under the circumstances existing at the time the contract was made and must not be punitive or a penalty.

Furthermore, the amount of the liquidated damages must be based on the anticipated losses that would result from the breach of the contract. If the amount exceeds the actual damages suffered by the non-breaching party, the provision may be considered unenforceable.

Benefits and Risks of Liquidated Damages

One of the main benefits of using liquidated damages is that they provide certainty and predictability in the event of a breach of the contract. This can save parties time and money that would otherwise be spent in court trying to determine the actual damages suffered.

However, there are also risks associated with using liquidated damages. If the amount of the damages is deemed unreasonable or punitive, the provision may be unenforceable, leaving the non-breaching party without the anticipated compensation. Additionally, liquidated damages may discourage the breaching party from fulfilling their obligations under the contract, as they may perceive the damages as just another cost of doing business.

Conclusion

Agreements for liquidated damages are a common tool used in commercial contracts in Connecticut. They can provide certainty and predictability in the event of a breach of the contract, but they must meet certain legal requirements to be enforceable. Before including a liquidated damages provision in a contract, businesses should carefully evaluate the potential benefits and risks and consult with a legal professional to ensure compliance with Connecticut law.