Case 16.2 Liquidated Damages
When entering into a contract, an individual may feel the need to protect themselves from damages arising from a service provider’s negligence or intended damages. As such, in the agreement, an individual can indicate the amount of damages that they can recover from a breach of contract (Fitzpatrick, 2020). These liquidated damages are intended to cushion the individual or entity from extreme losses.
Liquidated damages are only enforceable under three circumstances. Firstly, the affected party must prove that the losses cannot be readily estimated. If there is an estimation of the value of the damages, such as the cost of construction, the damage cannot be enforced (Benarroche, 2020). Secondly, the amount should be reasonable and should not function as a penalty but a method of cushioning the affected party. If the amount stated is above the actual capacity or is viewed as unreasonable by the court and the party, the damages cannot be enforced. Thirdly, the amount must have been agreed upon earlier. (Benarroche, 2020) The liquidated damages amount must be part of the contract. If not, the breach will not be enforceable.
It was unethical for but not illegal for Environ to avoid paying the full amount. Initially, Environ LLC had an obligation to SAM Hotels LLC that it failed to fulfill by providing a low-quality architectural design that led to the collapse of the building leading to SAM Hotels LLC facing extensive losses of more the two and a half million dollars. SAM LLC would have written a comprehensive contract that included a liquidation damages clause to protect itself from any breach by Environ. Environ had an obligation towards SAM Hotels LLC but failed to fulfill, which surmounted to a breach of contract.
References
Benarroche, A. (2020). Construction Contract Clauses: What Is a Liquidated Damages Clause? Retrieved from LevelSet: https://www.levelset.com/blog/liquidated-damages-clause/
Fitzpatrick, D. (2020). What Is a Liquidated Damages Provision? Retrieved from LoNo: https://www.nolo.com/legal-encyclopedia/when-are-liquidated-damage-provisions-enforceable.html