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Liquidated Damages Provision Or Unenforceable Penalty?

Thursday, December 01, 2011 06:02 am

 

There's an easy way to distinguish a liquidated damages provision from a penalty, according to the Supreme Court of South Carolina. If a contract seeks to measure actual damages that might be incurred because of a breach, that's valid compensation. If the sum is intended to punish for the breach, that's an unenforceable penalty. Deciphering the intent is the trick.

Provision singles out administrative burden

If a contract's language is clear and unambiguous, chances are a court will find it demonstrates a reasonable intention of the parties. That was the finding in ERIE Insurance Co. v. The Winter Construction Co., 2011 S.C. App. Lexis 163 (June 15, 2011), where the Court of Appeals of South Carolina overturned a ruling that a subcontract's liquidated damages provision was an unenforceable penalty.

The subcontract provision allowed the contractor "to charge all reasonable costs incurred [due to the subcontractor's failure to cure its default] ... plus an allowance for administrative burden equal to fifteen percent (15%) to the account of subcontractor." There was nothing ambiguous about the language, and the parties agreed to every provision in the contract. (In fact, the sub's president had initialed the page directly below the provision in dispute.)

The court held that the sum in question was [...]

 
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