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What are liquidated damages?

Contract breaches occur between business enterprises. In a breach’s aftermath, both parties might seek to recover their losses. Sometimes, the losses appear evident. Other instances might be ambiguous, but Michigan law does address a “gray area” loss claim. Under the law, a contract could include a clause for liquidated damages.

Exploring losses based on liquidated damages

A business contract might present a provision for liquidated damages to establish payments for intangible losses. If the contract stipulates that intangible losses come with a $100,000 settlement, then the party breaching the agreement may need to pay that amount when a breach occurs. Sometimes, paying the agreed-upon amount could be preferable to dragging things out in court at higher costs.

Why do such provisions exist? A contract breach may come with likely results that prove challenging to define specifically. If one party doesn’t deliver on promises, customers might go elsewhere and take their business with them. How much money ends up lost may be impossible to figure out. An intangible loss provision provides compensation at a previously established figure.

Negotiating the intangible loss provision

Business litigation might become unavoidable after someone breaches a contract. However, thoroughly understanding the contract before signing anything might make both breaches and litigation less likely. Do all parties understand what liquidated damages mean and how much money each must pay when a violation occurs? An attorney review, in part, involves reading the contract for a client. The attorney may explain various clauses, including those related to liquidated damages.

Although the liquidated damages clause appears in the contract, challenging the provision may be possible under certain circumstances. What if both parties performed a breach? That could have an impact on executing all provisions in the contract.