When one party breaches a contract, the non-breaching party may suffer financial losses directly caused from the breach. Such losses are called actual damages and serve to compensate a non-breaching party for the calculable losses caused by a breach, such as payment of any outstanding invoices for goods sold or services rendered, expenses, costs, and any other computable monetary loss.
Unlike actual damages, liquidated damages are an estimated pre-determined sum that one party (the breaching party) agrees to pay the other party (the non-breaching party) as compensation for a breach of the contract in lieu of the non-breaching party suing for the actual damages caused by the breach. For certain contracts, the benefits of incorporating this type of remedy include providing the parties with a predictable outcome as to the potential financial consequences for a breach and a more efficient dispute resolution process as compared to engaging in lengthy and costly litigation.
Florida Law on Liquidated Damages Clauses
Florida law permits contracting parties to stipulate to a specified amount of money to be paid or retained as liquidated damages as an alternative to the non-breaching party suing the breaching party for its actual damages suffered by the breach. Lefemine v. Baron, 573 So.2d 326, 328-29 (Fla. 1991) (holding “parties to a contract may stipulate in advance to an amount paid or retained as liquidated damages in the event of a breach.”) (citations omitted). Although such clauses are legally permitted, they must meet specific legal criteria to be valid.
Two-Prong Validity Test
For a liquidated damages clause to be valid under Florida law, courts apply a two-prong test: (1) the actual damages flowing from a breach of contract must not have been readily ascertainable at the time of contracting, and (2) the stipulated sum for liquidated damages must not be grossly disproportionate to the actual damages that might reasonably be expected to flow from a breach of the contract. Lefemine, 573 So.2d at 328. A liquidated damages clause that fails to meet either of these is not only invalid but also construed an unenforceable penalty. Id.
An unenforceable penalty is any stipulated sum that intends to either punish a party for a breach, induce a party to fully perform, or deter a party from breaching the contract. Id.; Resnick v. Uccello Immobilien GMBH, Inc., 227 F.3d 1347 (11th Cir. 2000) (“Liquidated damages are permissible where the award is intended as compensation for failure to perform.”); Goldblatt v. CP Motion, Inc., 77 So.3d 798, 801 (Fla. 3d DCA 2011) (stating the use of liquidated damages to penalize or deter a breach is never allowed) (citation omitted). In this regard, it's critical that the stipulated sum is for an amount that fairly compensates the non-breaching party. Id. (“The prime factor in determining whether such sum is a penalty or [liquidated damages] is whether the sum named is just compensation for damages resulting from the breach.”) (quoting North Beach Investments, Inc. v. Sheikewitz, 63 So.2d 498, 499 (Fla. 1953)) (emphasis removed) (alteration added). Simply stated, the stipulated sum must be reasonable.
What “Not Readily Ascertainable” Means
Damages that are “not readily ascertainable” means the actual damages reasonably expected to flow from a breach are difficult or impossible to estimate at the time of contracting. Goldblatt, 77 So.3d at 801 (“preciseness is not the legal standard” for assessing whether damages are not readily ascertainable at the time of contracting). This means that if actual damages can be approximately determined by some mathematical calculation, a formulaic approach, or per a pecuniary legal standard at the time of drawing up the contract, such damages are readily ascertainable. For example, in Humana Medical Plan, Inc. v. Jacobson, 614 So.2d 520 (Fla. 3d DCA 1992), a liquidated damages provision in an affiliate provider agreement was unenforceable for this reason. Specifically, the court found that the plaintiff (Humana) was capable of calculating its actual damages at the time of the contract by forecasting its revenues per enrolled patient plus its expenditures required per patient. The court's finding was supported by certain evidence showing that the plaintiff had in fact used such empirical data to calculate the purchase price of its predecessor’s assets.
Another example is the case of Goldblatt v. C.P. Motion, Inc., 77 So.3d 798 (Fla. 3d DCA 2011). This case involved a breach of a non-compete contained in a settlement and release agreement in connection with a termination of a business venture. There, the liquidated damages provision provided for a stipulated sum of $250,000 per breach of the non-compete. The court held it unenforceable. The court explained that the parties could have taken “a percentage of loss profits (of the specific lost client), or even by reclaiming any profits gained by the breaching party” to calculate the anticipated actual damages for the breach. Id. at 801. The fact that they failed to use either of these available methods to forecast the actual damages indicated that the stipulated sum was without any regard to what actual damages were. Id. This resembled an impermissible intent to deter a breach and impose a penalty for doing so, which is not allowed. Id.
Conversely, forecasting actual damages at the time of drawing up the contract might not be readily ascertainable in matters involving:
Non-disclosure and/or non-solicitation. See e.g., Vital Pharm. v. Alfieri, 20-61307-CIV-SINGHAL/VALLE at 7 (S.D. Fla. May. 9, 2022) (finding “the approximate loss in sales and market share from the disclosure of confidential business information or loss of valuable employees is highly indeterminate.”).
Construction. See e.g., Osceola County v. Bumble Bee Const., 479 So.2d 310 (Fla. 5th DCA 1985) (finding damages were clearly incapable of being ascertained at the time of contracting for the construction of a tourist information center).
Billing services. See e.g., Reliabill Sols. v. Milestone Detox, LLC, No. 20-60890-CIV-ALTMAN/HUNT at 6-7 (S.D. Fla. Jan. 20, 2021) (stating “the extent of the damages [] suffered as a result of the contract’s early termination were uncertain when the parties signed the contract because the contract involved ongoing [medical] billing processes rather than, for example, an exchange of a product for a sum certain.”) (alteration added) (citation omitted).
Personal services. See e.g., Posik v. Layton, 695 So.2d 759, 762 (Fla. 5th DCA 1997) (finding damages for breach of support services agreement were not readily ascertainable at the time the contract was created because such damages “would include more than mere lost wages and moving expenses[.]”) (alteration added).
Real estate sales. See e.g., Hutchison v. Tompkins, 259 So.2d 129, 132 (Fla. 1972) (acknowledging the real estate “market in Florida fluctuates from year to year and season to season and it is generally impossible” to foresee what the actual damages would be if a purchaser breached the contract by failing to close) (citation omitted).
Trademark infringement. See e.g., Blanco GmbH v. Vlanco Indus., LLC, 992 F. Supp. 2d 1225, 1252 (S.D. Fla. 2014) (acknowledging that “[l]iquidated-damages provisions are useful in trademark infringement actions because it is difficult for the owner of a trademark to prove the amount of his damage or how much of the damage is caused by infringement.”) (citations omitted).
Trade secrets. See e.g., Medical Equipment Rental Co. v. Tarr, 467 So.2d 459, 460 (Fla. 4th DCA 1985) (acknowledging that breaches involving trade secrets may not be readily ascertainable).
The above cases are merely illustrative and should not be construed as definitive when assessing whether a contract’s anticipated actual damages are readily ascertainable at the time of drawing up the contract. Each transaction must be individually evaluated to determine whether actual damages for a particular breach is capable of being forecasted as of the date of that particular contract. Apart from this, what Florida law makes crystal clear is that a liquidated damages clause intended to penalize a breach, induce a party to perform, or deter a breach, will not be enforced.
What “Not Grossly Disproportionate” Means
The phrase “not grossly disproportionate” means the stipulated sum is not excessive and must bear a reasonable relationship to the expected actual damages that would naturally flow from a breach of the contract. See generally In re SFD @ Hollywood, LLC, 411 B.R. 788, 798 (Bankr. S.D. Fla. 2009) (“A stipulated damages amount ‘is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss.’”) (quoting Restatement Second of Contracts § 356, Comment b (2009)); Resnick, 227 F.3d at 1351 (“Parties may not use [liquidated damages] provisions as a way to secure for themselves greater damages in the event of a breach than contract law would normally allow.”) (alteration in original) (citation omitted). In other words, for liquidated damages to be valid under this second prong the stipulated sum must be reasonable.
For example, in Axiom Worldwide, Inc. v. HTRD Grp. Hong Kong Ltd., No. 8:11-CV-1468-T-33TBM, 2013 WL 3975675 at 36-37 (M.D. Fla. Jul. 31, 2013), the court found the liquidated damages clause with a stipulated sum of $5 million for breach of the confidentiality agreement was grossly disproportionate. This result was based on evidence that the plaintiff had not generated any revenue or made any sales over the past few years. Consequently, it was held an unenforceable penalty.
In the case of Coleman v. B. R. Chamberlain Sons, 766 So.2d 427 (Fla. 5th DCA 2000), the court found that requiring a former employee to pay 200% of one year’s gross revenues for breach of the non-compete as liquidated damages was excessive. In addition, the former employer’s president admitted that the intent of the liquidated damages was to deter former employees “from taking customers and to penalize if they did.” Id. at 430. As such, it was held an unenforceable penalty.
In another breach of non-compete case, the court in Burzee v. Park Avenue Ins, 946 So.2d 1200 (Fla. 5th DCA 2007) also found the stipulated sum was excessive. There, the terms of non-compete provision required the former employee to pay $10,000 plus all commissions she earned on accounts she had “sold and/or serviced” during the 2 years prior to the date of her termination as liquidated damages for a breach the non-compete. Id. at 1201-1202. The court found this excessive because it was for the full amount of commissions earned by the former employer from any account the former employee had “sold and/or serviced” during the 2-year period, regardless of “the extent of that servicing, and undiminished by her share of the commissions or by any other expenses that [the former employer] might have incurred in connection with those commissions.” Id. at 1202 (alteration added). This along with the $10,000 on top of that was grossly disproportionate to the actual damages the former employer could have anticipated for her breach of the non-compete. Id. at 1203. Furthermore, because the damage calculation was the same regardless of whether she breached the non-compete with only one or 100 clients, the court found the stipulated sum bore no relationship to the gravity of the actual damages caused by her breach of the non-compete. Id. As a result, it was held an unenforceable penalty.
As illustrated in the above sample cases, where an agreed-upon sum is overly excessive, far exceeds, bears no relationship, or is unreasonably disproportionate to what would reasonably be expected as actual damages for a breach, it fails to satisfy the second prong and is an unenforceable penalty. Therefore, to mitigate the risk of such a result, it’s essential to ensure that the predetermined amount set for liquidated damages in the contract is reasonable to what would roughly be expected as actual damages if the contract was breached.
Two Additional Enforceability Considerations
Although a liquidated damages clause may pass the two-prong validity test, it may nevertheless be unenforceable if the contract provides it as an optional legal remedy, creates an opportunity for a double recovery, or is found to be unconscionable.
1. Not an Optional Legal Remedy
Under Florida law, a contract providing a non-breaching party with an option to choose between recovery of the agreed-upon sum for liquidated damages or, in the alternative, suing for actual damages, renders liquidated damages to be an unenforceable penalty. This is because Florida courts interpret the right to pursue optional legal remedies (known as “non-exclusive legal remedies”) indicates an intent to penalize and negates an intent to liquidate damages. See e.g., Lefemine, 573 So.2d at 328-29 (lease agreement providing option to retain deposit or sue for damages indicates an intent to penalize, negates an intent to liquidate damages, and is an unenforceable penalty); Cloud v. Schenck, 869 So.2d 709 (Fla. 1st DCA 2004) (contract providing sellers with an option to retain deposit as liquidated damages or pursue actual damages was “a penalty as a matter of law and is invalid.”); Global Facility Mgmt. & Constr., Inc. v. Joe & the Juice Miami LLC, 63 Misc. 3d 1230, 115 N.Y.S.3d 615 (N.Y. Sup. Ct. 2019) (relying on both Florida and New York law to find liquidated damages provision in construction management contract was an unenforceable penalty because it also provided the plaintiff with an opportunity for full recovery of actual damages) (citations omitted).
This rule generally does not apply to contracts that provide an option to pursue equitable remedies (such as, for example, specific performance). Lefemine, 573 So.2d at no. 5 (noting the court’s holding does not “imply that a liquidated damages clause which merely provide[s] the option of pursuing equitable remedies would be unenforceable.”) (alteration added) (citations omitted).
However, the optional equitable remedy must not result in a double recovery for the non-breaching party, but rather must stand on its own as the choice of remedy for breach of the contract. See e.g., MCA Television Ltd., 171 F.3d at 1272 (“Damages and [the equitable remedy of] restitution will not be given as concurrent remedies for the same injury. The plaintiff will not be given judgment for his money back and at the same time a judgment for the value of the performance promised him.”) (quoting Corbin on Contracts § 1223 at 482) (alteration added); Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20 (Fla. 4th DCA 2008) (liquidated damages clause giving seller option to retain deposit or sue for specific performance of contract and obtain delay damages for the delay held enforceable); San Francisco Distribution Ctr., LLC v. Stonemason Partners, LP, 183 So.3d 391 (Fla. 3d DCA 2014) (agreeing with Mineo to hold that contract providing for liquidated damages with an option to sue for specific performance did not render the liquidated damages provision unenforceable).
2. Technically Valid, But Unconscionable
Even where a liquidated damages clause passes the two-prong validity test, is not an optional legal remedy, and would not provide a double recovery to the non-breaching party, it may be unenforceable if it is found to be unconscionable. A court, under principles of equity, can find that enforcing an otherwise valid liquidated damages clause would result in an inequitable result and is unconscionable to enforce. See generally Bruce Builders, Inc. v. Goodwin, 317 So.2d 868, 869-70 (Fla. 4th DCA 1975) (“[I]f subsequent circumstances demonstrate it would be unconscionable to allow [] the sum in question as liquidated damages, equity may” reject its enforcement) (alteration added). The term “unconscionable” broadly refers to a result that is so incredibly unfair that it would “shock the conscience” of the court. See generally In re SFD @ Hollywood, LLC, 411 B.R. at 799 (citation omitted).
To evaluate whether a liquidated damages clause is unconscionable, courts examine the intent of the parties, the contract as a whole, the circumstances existing at the time of breach, and the proportionality between the liquidated damages and the actual damages suffered at the time of the breach. Id. (citation omitted).
For example, a court may find enforcing a liquidated damages clause is unconscionable if the breach was a result of circumstances that were beyond the control of breaching party, the non-breaching party did not suffer any actual damages, or the stipulated sum is grossly disproportionate to the actual damages suffered at the time of breach. See e.g., Parrish v. Dougherty, 505 So.2d 646 (Fla. 1987) (liquidated damages clause amounting to $9,800 for failure to return a $5,000 deposit was patently unconscionable); Reliabill Sols., LLC v. Nova Vitae Treatment Ctrs. Inc., No. 19-25133-CIV-SCOLA at 3 (S.D. Fla. Jun. 22, 2020) (finding unconscionable a liquidated damages clause amounting to an astronomical award of $462,165.49 for breach of a medical billing services contract); San Francisco Distribution Ctr., LLC, 183 So. 3d at 394 (noting that Florida courts have held that a stipulated sum for liquidated damages in a contract for the sale of real estate that amounts to 10% or less of the total purchase price is not unconscionable) (citations omitted); RKR Motors, Inc. v. Associated Uniform Rental & Linen Supply, Inc., 995 So.2d 588, 595 (Fla. 3d DCA 2008) (finding stipulated sum of $102,302 for liquidated damages was unconscionable where damages for actual lost profits was only $10,437).
Significantly, the element of proportionality between the sum of liquidated damages and actual damages evaluated for purposes conscionability is also an initial consideration under the two-prong validity test first addressed above. The main distinction between the two is that one evaluates the reasonableness of the stipulated sum at the time of contracting while the other is evaluated at the time of the breach. The key takeaway here is the weight that courts place on the reasonableness of the stipulated sum, further stressing the importance of ensuring the sum is reasonable.
Final Remarks
Florida law permits contracting parties to stipulate to a sum for liquidated damages in their contracts. Where appropriate, this alternative breach of contract remedy provides the contracting parties with a level of certainty as to the financial consequences for a breach, permits them to better allocate their risks in advance, and provides a more efficient resolution to settle the breach.
Although these clauses are generally permitted, they're not suitable for all contracts. As addressed above, a liquidated damages clause that is undisputedly intended to penalize, induce performance, or deter a breach is never enforceable - this is straightforward. Otherwise, determining the suitability of a liquidated damages clause for a particular contract requires a proficient understanding of the legal nuances that implicates both validity and enforceability issues at the time of drawing up the contract and at the time of enforcement.
In general, when contemplating the suitability of liquidated damages for a particular contract, some standard considerations should include:
What is the intent for including liquidated damages as a breach of contract remedy? To penalize? To induce performance? To deter a breach? To settle damages in advance for a breach?
At the time of drawing up the contract, is it difficult or impossible to approximately calculate what would reasonably be expected as actual damages if the other side breaches?
At the time of drawing up the contract, can a mathematical calculation, formulaic approach, or pecuniary standard set by law be used to estimate what would reasonably be expected as actual damages flowing from a breach of the contract?
Is the stipulated sum reasonably proportionate to what is roughly expected as actual damages if the other side breaches?
Is the recovery of liquidated damages specified as the exclusive breach of contract legal remedy in the contract?
Does the contract specify a particular equitable remedy that would result in a double recovery?
What level of likelihood does the stipulated sum have to survive an unconscionability claim?
Finally, it's important to note that the considerations and issues addressed in this post are not all-inclusive. Subject to the nature of the transaction, there may be others that could impact the suitably and enforceability of a liquidated damages clause.
The information provided in this post is for general informational purposes and not intended as legal advice or legal opinion for any individual matter. Keep in mind that legal developments or changes to law may occur in the future and, as such, the information contained in this post may not be the most up-to-date legal or other information. Do consult your own attorney for any legal advice you may require. If you do not have an attorney and would like to explore a potential engagement, please reach out to Venus Caruso using the contact submission form or by using the contact information provided in her bio.