Contracts are effective tools for communicating the rights and obligations of parties that are working with one another for mutually beneficial reasons. Contracts often work without a problem. But other times, breaches will happen, which is why parties have liquidated damages in Florida.
They’re an important legal remedy used in various contracts, including real estate and construction agreements. This article will discuss what liquidated damages in Florida are, how they’re used, and what they mean for you.
What Are Liquidated Damages in Florida Law? Our Definition
In Florida law, when answering the question, “What is a liquidated damages clause?” our team likes to keep it simple. Our liquidated damages definition is that liquidated damages are damages that the parties in a contract agree to ahead of time if one party fails to perform.
Liquidated damages definitions can sometimes vary depending on who you ask and other contexts. This is especially true given the fact that they are most frequently used in construction and real estate agreements. In some cases, the term “liquidated damages” is used as a general term for clauses that allow the parties to specify a penalty if one party fails to perform any obligation under the contract.
Other times, the term is used to refer to clauses in which the parties agree to a specific amount of money that they will be paid in the event of a breach of contract. In any case, liquidated damages are about the allocation of risk between parties under the terms of a written contract.
Why Include a Liquidated Damages Clause in a Service Contract?
A liquidated damages clause in a service contract can help hold the service provider accountable for their work. It can help ensure the work is done correctly and the service provider doesn’t pass along additional costs to the property owner. This makes it relevant to construction and real estate law in Florida, helping owners and contractors steer clear of construction and real estate scams in Florida.
It can also be helpful in cases where the property owner is seeking to limit their liability, such as in the event that the service provider is unable to complete the work on time or in accordance with the original contract. By agreeing to a liquidated damages clause in Florida service contracts, the property owner can ensure that the service provider is held accountable for their performance while limiting their financial liability.
This is especially relevant in the case of construction, where the property owner is typically responsible for paying the costs associated with the construction project. Liquidated damages for delays in construction contracts can help to ensure that the property owner isn’t on the hook for these unexpected costs.
What Are the Benefits of a Liquidated Damages Provision?
A liquidated damages provision in an agreement between parties can provide a variety of benefits when it comes to negotiating power, enforcement, and administration in the event of a breach. Here are some of the general attributes of liquidated damages that you may find beneficial depending on the nature of your contract:
- A way to force the commitment of the parties for fear of having to pay the liquidated damages amount following a breach.
- Allows parties to calculate and plan for their potential risk if they were to violate the contract terms.
- Could avoid an unfavorable judgment from a jury or court on the number of damages available under a contract claim.
- Provide a reasonable figure for damages in cases where it may be difficult or impossible to accurately calculate loss.
- Provide an estimate of actual damages.
- Provide recourse for a party unjustly harmed because of a counterparty’s actions, inactions, or other omissions.
A fairly calculated liquidated damages clause can save parties time and expense when it comes to determining damages in court or through arbitration. Although, parties may be quick to argue over whether the conduct was a breach entitling one of the parties to liquidated damages in the first place.
What Are Liquidated Damages in Real Estate Contracts?
Liquidated damages in real estate contracts are predetermined amounts that a party must pay to another for failing to perform under the contract terms concerning the sale or purchase of real estate. Placing value on a real estate contract is difficult, which is why liquidated damages are an effective solution.
Liquidated damages will likely exist in a real estate contract because of the buyer or seller’s inability or unwillingness to execute the sale. Other material breaches related to a residential or commercial real estate sale that could give rise to liquidated damages include delays in closing on the deal that harm other business endeavors. Liquidate damages in a real estate contract may also provide an alternative to other remedies like specific performance (i.e., where a court forces the sale of the real estate through a quiet title action Florida ruling).
Example of Liquidated Damages in Real Estate
For a liquidated damages example, consider the owner of a vineyard who wants to buy some acres adjacent to his real estate that just went for sale from a neighbor’s vineyard. The vineyard owner wants to buy the extra acreage because one of his customers, a winemaker, expressed an interest to buy a larger amount of his grape production if possible.
The vineyard owners make an offer to his neighbor and make it clear in the real estate contract why he is buying the extra acres. He also imposes a liquidated damages clause for $100,000 in case the sale does not close in time to supply the extra grapes to his customer. The neighbor and vineyard owner agree to the terms and proceed with necessary appraisals and inspections while they wait to close on the deal in a few months.
In the meantime, the vineyard owner goes to his customer to share the good news about the extra acreage he is buying and that he will be able to supply him with the grapes he needs for his latest line of red blends. While excited, the winemaker has his doubts. He’s received empty promises in the past and places a $50,000 liquidated damages term into their purchase agreement.
Unfortunately, the neighbor later has a change of heart about selling the land to the vineyard owner because he wants to leave the property to his son who wants to pursue winemaking. The deal falls apart and the vineyard owner disappointedly tells his customer. The customer responded by claiming payment for $50,000 under the terms of their agreement. The vineyard owner then turns to the neighbor to collect the $100,000 under his liquidated damages clause.
The parties dispute the liquidated damages terms and seek judgment in Florida court. The judge chooses to award only $50,000 of the liquidated damages owed to the vineyard owner because it is a more reasonable measure of the vineyard owner’s actual losses from the breach of the real estate contract.
What Are Liquidated Damages in Construction Contracts Useful For?
Liquidated damages in construction contracts are meant to remedy a party harmed as a result of the breach of contract from a general contractor or subcontractor. Liquidated damages can cover different aspects of the contract such as construction defects, unreasonable delays, or other failures of the party to perform.
In some ways, a liquidated damages clause works like a construction lien, which provides a contractor with a remedy in the event of a property owner’s nonpayment.
Liquidated Damages Construction Example
Let’s assume a homeowner needed a new roof installed on his house because the current one is about to reach its lifespan and the owner is noticing leaks when it rains. The homeowner meets with a roofing contractor who says they can complete the project before the rainy season.
The homeowner had been hearing about real estate scams in Florida lately and was suspicious of the roofer, so he insisted on a liquidated damages clause. As part of the contract terms, the parties agree to a liquidated damages clause of $25,000 if the roofing contractor does not timely perform under the agreement.
The roofing contractor gets halfway through the project when he unexpectedly abandons the project to pursue a career in Hollywood. Unfortunately, the homeowner is unable to find a replacement roofer before a rainstorm hits and damages a ton of his personal property. The homeowner would likely be able to enforce the liquidated damages provision because the roofing contractor failed to complete the project.
When Can Liquidated Damages Be Claimed?
Contracting parties can claim liquidated damages depending on the terms of their written agreement. Generally, you can claim liquidated damages following the occurrence of a triggering event or other condition under the contract (usually a material breach of contract). However, liquidated damages may not be enforceable in some cases.
The Florida Uniform Commercial Code, for instance, places limitations on the enforceability of a liquidated damages clause in a contract. Specifically, the liquidated damages must be reasonable after accounting for the anticipated or actual harm from a breaching party. For example, a party with losses of $5,000 under a contract would have a difficult time enforcing the full amount of a $1,000,000 liquidated damages clause.
As a matter of public policy, Florida courts will void unreasonably large liquidated damages provisions, making it an unenforceable penalty.
Need Help with a Florida Liquidated Damages Real Estate or Construction Clause?
If you regularly participate in real estate, construction, or other high-value industries, you should understand how liquidated damages contract law may apply to your agreements. The Florida construction lawyers at Cueto Law Group are always available to discuss your legal rights related to a liquidated damages clause or when it comes to negotiating such a clause in one of your contracts.
Contact Cueto Law Group for a consultation about a liquidated damages clause in your contract.
Our Final Points on Liquidated Damages Clause Florida Law
A liquidated damages clause can be a useful tool for parties to fairly allocate risk and financial exposure at the time of contract. Each liquidated damages term will require careful attention to the nature of the agreement and the legitimate interests of the contracting parties to avoid creating damages that are unenforceable because they are too unreasonable.
Additionally, parties should carefully consider their potential financial liability based on the amount of money they could have to pay in the event of a breach. Seeking legal advice from a law firm can help you make an informed decision about signing an agreement with a liquidated damages clause.
Liquidated Damage Clause FAQs
The following are some answers to other frequently asked questions you may have about liquidated damages clauses in Florida.
Liquidated Damages vs Actual Damages: What’s the Difference?
Several differences exist between liquidated damages versus actual damages. Primarily, liquidated damages are estimated figures about potential loss determined before a breach. Actual damages, in contrast, reflect quantifiable losses you experience after a contract breach. You won’t be able to know your actual damages until after harm occurs.
Your actual damages from a breach of contract could include several different economic and non-economic damages. Common examples include additional incurred expenses, loss of profits, etc.
Are Liquidated Damages Enforceable in Florida?
Liquidated damages are generally enforceable in Florida so long as they are in a written agreement and meet other requirements of Florida State law. Under the Florida Uniform Commercial Code, liquidated damage terms must be reasonable considering the actual or anticipated harm of the contract breach.
What Is the Difference Between Liquidated Damages and Penalty?
Liquidated damages are meant to remedy the losses one party incurs as a result of a breaching party. This differs from a penalty where the focus is to deter a party from breaching. Florida courts will generally void liquidated damages that are seen as penalties.
Florida courts require that the number of liquidated damages in a contract have some connection to the actual losses a non-breaching party might have.
