Article: Business Law
Liquidated Damages as a Solution to the Issue of Proving Lost Profits from Breach of Contract
It is not uncommon for a supplier to be involved in a breach of contract dispute with a company that breaches its contract with the supplier. Under Georgia contract law, the supplier is entitled to breach of contract damages that naturally and normally arise from the breach of contract. Recoverable damages also include losses within the contemplation of the parties that were a probable result of such a breach of contract. O.C.G.A. § 13-6-2. The damages that may be recovered may include lost profits but only if they can be proven with relative certainty. Any damages, including future profits that are too remote or speculative are not recoverable. See O.C.G.A. § 13-6-8.
Unfortunately, lost future profits are often difficult to recover in Georgia breach of contract litigation because vague or speculative damages are not recoverable, and lost future profits often do not lend themselves easily to exact computation. In some situations, a Georgia business may have a long track record of established profits so that it is possible to provide a fair calculation of lost future profits, which were clearly within the anticipation of the parties at the time the contract was formed. Sometimes damages may be recovered at least over some short duration of time even when precise calculation is not possible.
Many times Georgia suppliers use contract provisions that provide for liquidated damages in the event of a breach of contract. A properly drafted liquidated damages provision in a Georgia contract may be enforceable and provide a way to protect recovery of lost future profits in the event of a breach of contract. It is important to keep in mind that Georgia courts do not favor liquidated damage provisions so it must be artfully drafted and meet certain requirements to be enforceable under Georgia contract law.
A liquidated damages provision is basically an agreement by the parties to predetermine damages prior to a breach and include this calculation in the agreement. If the liquidated damages provision does not meet certain criteria, a Georgia court may find that it is an impermissible “penalty” and rule that it is unenforceable in Georgia breach of contract litigation. A Georgia court may find that a contractual provision that stipulates a specific sum shall be paid by one party to the other upon cancellation or termination of a contract may be an enforceable liquidated damages provision when three conditions are satisfied:
- The damages caused by a breath are difficult to accurately estimate;
- The parties must intend to provide for damages rather than a penalty; and
- The amount of the damages is a reasonable estimate of the probably loss from the breach of contract.[Southeastern Land Fund, Inc. v. Real Estate World, Inc., 237 Ga. 227 (1976)]
If the amount of actual damages cannot be reasonably calculated, then the sum in the contractual provision may be considered a liquidated damages provision as opposed to an impermissible penalty. Determining the amount of liquidated damage calculation must be done carefully. If the amount does not bear some reasonable relationship to an actual calculation of damages because it is clearly excessive, the court will typically not enforce the liquidated damage clause because it is an impermissible penalty. For example, an appellate court did not uphold a liquidated damages provision that provided for 40 percent of the weekly service amount for the balance of the term of the contract where the only damages that could be proven amounted to $76,500, but the liquidated damage amount would have been over $480,000. National Service Industries v. Here to Service Restaurants, 304 Ga. App. 98 (2010).
While a liquidated damages clause can avoid costly litigation designed to quantify future lost profits or avoid loss of those sums entirely, the provision must be artfully constructed to avoid a court deeming the provision to be an unenforceable penalty assessed against the party in breach of contract. The provision should also be tailored to the specific transaction in most cases as opposed to a general formula that may not have any relationship to an actual approximation of damages in a specific Georgia breach of contract lawsuit.
Our experienced Georgia breach of contract litigation attorneys routinely handle litigation involving lost future profits with and without liquidated damages provisions. If you are involved in a breach of contract dispute, our business litigation team can analyze the documents involved in your dispute and provide an overview of your options.
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