Its time we talked about Liquidated Damages

I love talking about liquidated damages these days.

But I am sure, before COVID-19 came along, the only kind of liquid damage we all regularly talked about was the damage we felt after a night out on a certain type of liquid.

Did I, as a legal professional, talk about liquidated damages before COVID-19 came along? Sure, because it’s an incredibly important legal concept but it was not like it was a concept I’d rely on in nearly every single contract I wrote (but then again, I wasn’t exactly dabbling in force majeure clauses on a regular basis either, unless I was involved in the development of contracts for large IT or construction industry).

So why am I talking to you about liquidated damages all of a sudden?

I was given a lot of the terms by wedding and event suppliers during the peak crisis period of COVID-19 (that is of course to say we are even out of that peak crisis period!).

What I was reading were attempts to describe that initial payment, that as a payment would lock in a particular date. Then it would be some kind of hybrid cancellation fee if the couple decided to cancel at a certain point and then some magic figure or percentage that would “do the trick”.

However, sadly, the magic figures didn’t do the trick. The wording wasn’t great. And many in the industry found themselves in disputes about having “that payment” back.

The reality is that the issue of non-refundable booking fees (or deposits or retainers, whatever your favourite word for it is) have been one of the most contentious issues that have arisen in my practice in the last twelve months.

The advice to my clients has been clear. Your terms need to refer to your booking fee as having been calculated as a form of “liquidated damages”.

What many people may not know is that a contract must not contain a clause that appears to impose a harsh monetary punishment for a breach of contract. It has always been an attractive option for those who wish to retain monies if wedding clients cancel, but the contractual term may find itself void if it is set at an amount that is not relative to the actual loss that would be suffered if a wedding client cancelled.

Given that there is no real way of determining what the actual loss may be (we often don’t know how far out they cancel from the wedding date, how easy it may be to “fill” the date with another client, whether that other client will spend the same amount as the client cancelling), the best way to deal with this situation is to set the booking fee as liquidated damages. Liquidated damages are a pre-estimated amount agreed upon by both parties at the start of the contractual relationship. It is a realistic fixed amount or rate stipulated in the contract and you are signalling, to each other as parties to the contract, that the amount set is what the damage would most likely be if they cancel.

Not only does it signal to the parties at the time, but it also shows the Court that the likelihood of damage if the contract was breached was contemplated at the very start and that the amount was agreed by both parties as being realistic.

Putting in a clause such as this in the Terms will, among other things, give the parties certainty and prevents arguments about proving loss.

Please don’t attempt to draft your own liquidated damages clause.

Leave it to us lawyers to do that for you. However, having an understanding of this legal mechanism and why it is important could just restore your faith in your contracts if you know you have it in there and know why.

If you work with us, we not only help you word your booking fee clause to incorporate that clause, but we also talk you through the setting of that fee and other mechanisms that you may wish to have in your contract to minimise disputes moving forward.

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