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  • Hospitality Law

  • Liquidated Damages: Protecting Your Franchise's Good Name

  • By Al DeNapoli, Partner, Tarlow Breed Hart & Rodgers, P.C.

  • Cicero tells the story how in ancient Syracuse, Damocles gave back the throne to the reigning king when he realized the king had perched above him a sword hanging from a fine thread. Liquidated damages, in some instances, work like the proverbial "Sword of Damocles": hovering above the parties as a threat in case of a breach of contract.

    While the law in each state differs as to the use and acceptance of liquidated damages, the most widely-used basis for a generic explanation of the concept of liquidated damages comes from the Restatement of the Law: Contract Second:

    Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing an unreasonably large liquidated damage is unenforceable on grounds of public policy as a penalty. (p. 157)

    When entering agreements in which you believe you may not be able to easily assess damages that may be caused by a breach, and/or you wish to keep the other party focused on the amount of damages it may face if it fails to perform, liquidated ...

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