Liquidated Damages In Washington State
When parties enter into a contract, they usually assume the contract will be performed. But what happens in the event of a breach? The default is for a dispute to spawn litigation if the parties cannot resolve it on their own. Ordinarily the non-breaching party must establish with reasonable certainty their actual damages to obtain a money judgment against the breaching party. This can be quite time consuming and costly. Particularly in situations where a breach would be clear cut, but establishing the precise amount of actual money damages would involve high cost and delay, parties may find it appropriate to specify a fixed amount of money damages in the contract in the event of a breach. This is known as a “liquidated damages” clause.
In Washington, a liquidated damages clause is generally enforceable so long as it does not amount to a “penalty.” In determining whether the amount of liquidated damages constitutes a penalty, courts apply a two-factor test. First, the amount of liquidated damages at the time of the contract must be a reasonable forecast of just compensation for the harm caused by the breach. Second, the harm cause by the breach must be incapable or very difficult of accurate estimation. Although the “reasonable forecast” test is primarily measured as of the time of contracting, a court may consider actual damages where they are so disproportionate to the estimate that to enforce the estimate would be unconscionable.
In some instances, the enforceability of a liquidated damages clause may be governed by statute. For example, in the case of a straight contract for the sale of real estate, liquidated damages generally may not exceed five percent of the purchase price, per RCW 64.04.005(1). Whether you are in the process of forming a contract, or in a dispute over damages for a breach that develops afterwards, the lawyers at Beresford Booth can help you navigate and protect your rights. We have extensive experience in drafting and litigating business and real estate contracts.