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A contract is a legal agreement between two or more parties that states the obligations and responsibilities each person agrees to uphold. Including damage clauses in contracts is one way to protect yourself if the other party doesn’t meet their obligations.
Many kinds of contracts include a damage clause, also known as liquidated damages. While they are common, damage clauses can be complex with many components. Their purpose is to create clarity between the contracting parties and help build trust in the business relationship.
Take a closer look at why damage clauses are key in North Carolina business contracts.
Why Damage Clauses Are Important
Every business venture comes with risks, but there are ways to protect yourself against losses that are caused by someone else’s negligence. A liquidated damage clause designates that a specified lump sum of money will be paid to one party in the contract to compensate for intangible losses.
“Intangible loss” refers to damage that is real but can’t be valued with a precise dollar amount. For example, a missed deadline can lead to a devastating financial loss. Including a damage clause in your contract will protect you from absorbing that loss on your own.
The clause names an amount of compensation that both parties believe is reasonable. That number is a direct reflection of how important it is for all concerned to meet the terms of their contract.
When is a damage clause enforceable?
Including a damage clause in your contract does not necessarily mean it will hold up in court if a dispute leads to litigation, however. There are two main concerns when it comes to the strength of a damage clause: fairness and the ability to estimate damages.
A Damage Clause Must Be Fair
Liquidated damages are meant to be fair. For instance, a court may not uphold a damage clause if it’s found to be unreasonable or punitive in nature. In North Carolina, if a judge finds the compensation number was grossly disproportionate to any actual harm, the clause might not be considered legal.
Damages Can’t Be Estimated Accurately
Depending on the breach, damages can be difficult to calculate. If one party’s negligence causes a loss of sales, those numbers can be estimated, but the damage caused by breaking a confidentiality agreement is harder to quantify. To be enforceable, the damages connected to the breach must exist, but must be difficult to estimate.
Other Considerations
The more details that are added to a contract, the more costly the process becomes. Adding and negotiating a damage clause can increase the time it takes to negotiate the agreement and could cost you a new client or opportunity.
These potential complications don’t mean you should avoid including damage clauses when they are appropriate. Clear and reasonable damage clauses protect you and your business when your contracting party does not meet their obligations.
To be effective, damage clauses should be clear and well-written. A poorly written clause could lead to litigation, which may interrupt cash flow and delay progress.
Protect Your Business With a Damage Clause
A damage or liquidated damage clause is a common but complex addition to a business contract. There are several kinds of damage clauses, and they can be written to protect a single party or all parties who are entering into a legal agreement.
Overall, these clauses help to minimize future issues and establish a baseline for reparations in the case of a breach. To achieve this, damage clauses should be well-written, as poorly constructed and unreasonable clauses could lead to litigation and unexpected legal fees.
The experienced team of Hickory commercial litigation attorneys at Patrick, Harper & Dixon can help ensure your contracts effectively protect your business in North Carolina. Contact us to schedule a consultation today.
