Illinois’ First District provides an exhaustive analysis of liquidated damage principles in GK Development, Inc. v. Iowa Malls Financing Corporation, 2013 IL App (1st) 112802.
Here are some useful bullets:
- In Illinois, contracting parties are free to pre-set damage amounts; but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.
- A liquidated damages clause must be for a specific amount and for a specific breach.
- A clause that penalizes a party for non-performance or that works as a threat to secure performance, violates public policy and is unenforceable.
- Three elements of an enforceable liquidated damages provision include whether: (1) the parties intended to agree in advance to the settlement of damages that might arise from the breach; (2) the amount of liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained, and (3) actual damages would be uncertain in amount and difficult to prove.
- “The element common to most liquidated damages clauses that get struck down as penalty clauses is that they specify the same damages regardless of the severity of the breach.” (i.e. If tenant breaches 10 year lease at year 9 or year 1, damages are the same.
- Courts will guard against giving the non-breaching party a windfall recovery that places it in an even better position than it would be in if the other party performed.
- Where liquidated damages dwarf the actual damages (here, $4.3 M vs. $150K) likely to result from a minor breach, it will likely signal an unenforceable penalty to punish non-performance.
- Parties distinguish between (1) a total breach of contract and (2) a minor delay in performance. If they fail to do so, there’s a real risk the liquidated damages term gets struck down as punitive.