Liquidated Damages Provisions in Commercial Contracts and the Rules Georgia Law Imposes on Them

A successful commercial contract must do many things. One of those objectives is to function correctly if you are the victim of the other side’s breach. To that end, success requires ensuring that your contract is free of provisions or clauses that do not comport with Georgia law and, if challenged, will be tossed as unenforceable, weakening your right to obtain relief. The right Atlanta commercial contracts lawyer can help you to avoid this and other critical pitfalls.

A recent federal case shows what can happen when a contract clause isn’t compliant with Georgia law.

The parties to the lawsuit were a suburban Atlanta-based company that “helps companies select and use computer software to… manage… their business” and a Minnesota-headquartered subcontractor that dealt primarily in training users on software packages like Microsoft Dynamics AX.

The contractor and subcontractor collaborated on a bid to replace a large construction conglomerate’s software with Microsoft Dynamics AX. Before they submitted the bid, they inked a “mutual confidentiality agreement.” That contract contained a liquidated damages provision.

Ultimately, however, the two sides disagreed on the volume of the subcontractor’s work and the subcontractor withdrew from the bid. The contractor continued without the subcontractor, but the client became disenchanted with its performance. The client eventually retained the Minnesota company to take over the project.

The Georgia firm then sued the Minnesota entity for breaching the confidentiality agreement. While the plaintiff succeeded in recovering nominal damages, it took nothing on its claim for liquidated damages claim, as the court determined that the relevant provision in the parties’ contract was unenforceable.

Three Essential Elements of a Valid, Enforceable Provision

The Georgia Supreme Court, in previous rulings, has made it clear that, in this state, a “liquidated damages clause is enforceable if (1) the injury caused by the breach of the contract is difficult or impossible to accurately estimate; (2) the parties intended to provide for damages rather than a penalty; and (3) the sum stipulated upon by the parties is a reasonable pre-estimate of the probable loss.”

One of the crucial words in that paragraph is “and.” If a party falls short on any of the three factors, then the liquidated damages term is unenforceable under Georgia law.

In this case, the shortcoming was element number three. The parties’ agreement expressly declared liquidated damages would be an amount equal to “all… compensation or benefits which [the breaching] Party directly or indirectly realizes as a result of such breach.”

The provision should have reflected an amount that made the harmed entity whole. Instead, it simply gave the harmed business 100% of the breaching party’s profits. As the court explained, it was not automatically true that the amount of the Georgia company’s losses necessarily equaled whatever sum the Minnesota company received from its work with the client. As written, the term functioned less like a liquidated damages provision and more like a penalty clause, having the effect of putting the injured party in a much better position than it would have been had the breaching company never breached at all.

That kind of liquidated damages clause is not enforceable under Georgia law, so the trial court was correct in tossing the liquidated damages claim.

When a contract partner breaches an agreement, the negative impact on your business is often complex. The harm you’ve suffered may extend across multiple types of damages. Whatever is needed to protect your business’s interests, the experienced Atlanta commercial contracts attorneys at Poole Huffman, LLC know how to help. As the TV commercial says, “we know a thing or two because we’ve seen a thing or two.” We’ve encountered these contract issues before so we know what techniques and strategies work best for each client’s unique circumstances. Contact our team online or by calling 404-373-4008 to schedule your confidential consultation today.