Liquidated Damages Provisions in Illinois: Specific Amount for Specific Breach = Good; Optional or Penalty = Bad

imageLiquidated damages clauses appear frequently in a variety of commercial contracts and similar agreements. Several Illinois cases – some old and some very recent – examine liquidated damages clauses in multiple factual settings.

Here are some bullet-point liquidated damages rules, gleaned from the caselaw:

– Liquidated damages clauses are enforceable where:  (1) the parties intended to agree in advance to the settlement of damages that might arise from a breach;(2) the amount provided as liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained; and (3) the actual damages would be uncertain in amount and difficult to prove

– Damages must be in a specific amount for a specific breach – they may not be a penalty to punish nonperformance or a threat to secure performance:

– The key issue is whether the liquidated damages amount is a reasonable forecast of possible loss at the time of contracting.  Parties are not required to make the “best” damages estimate, just one that is reasonable.

Recent cases in which liquidated damages provisions were upheld:

Dallas v. Chicago Teachers Union 408 Ill.App.3d 420, 424 (1st Dist. 2011)(held: liquidated damages clause setting $100K as minimum damages if either party breached a confidential settlement agreement was valid.  $100K was reasonable figure based on plaintiff’s pre-settlement agreement salary history and desire for future employment with Chicago Teachers Union)

Karimi v. 401 N. Wabash Venture, LLC, 2011 IL App (1st) 102670; and Burke v. 401 N. Wabash Venture, LLC, 2013 WL 1442280 (7th Cir. 2013).

In Karimi and Burke, the First District and Seventh Circuit (Burke was a diversity case) respectively, enforced liquidated damages clauses in Trump Tower condo purchase contracts which stated that if buyer breached, seller’s remedy was retention of the buyer’s earnest money deposit – 15% of the condo unit’s sale price.  The courts held that this amount was both specific and reasonable enough to be enforced against the breaching buyer.

Three cases with  unenforceable liquidated damages clauses:

Med+Plus Neck & Back Pain Center v. Noffsinger, 311 Ill.App.3d 853 (2000).

 – liquidated damages clause in two-year employment contract invalid where (a) it’s a penalty to secure performance and (b) damages bore no relationship to possible damages if employee prematurely breached.  Evidence of the penal nature of the provision was the fact that employer’s damages decreased the longer the defendant employee worked for employer and increased the earlier employee breached).  

Grossinger Motorcorp, Inc. v. American National Bank & Trust Co., 240 Ill.App.3d 737 (1992)

– liquidated damages clause in a real estate contract struck down due to its optional nature: plaintiff could either (a) recover liquidated damages (keep the earnest money) or (b) at plaintiffs option, exercise other remedies.

H&M Driver Leasing v. Champion, 181 Ill.App.3d 28 (1st Dist. 1989)

– liquidated damages clause in truck driver services contract clearly a penalty to secure performance where contract provides for baseline liquidated damage amount AND actual damages:

Now What??

– If you are trying to enforce a contractual liquidated damages provision (LDP) in the Illinois courts, Karimi, Burke and Dallas should prove useful.  If you’re opposing and trying to defeat an LDP, you should try to analogize your case’s facts to those of the Med+Plus, Grossinger and H&M Driver Leasing cases.

– If a contract sets forth a specific amount for a specific breach, and it’s a reasonable forecast of possible damages (based on objective data to support the liquidated amount – see Dallas – plaintiff’s salary history provided a quantifiable basis to support minimum damage figure), the liquidated damages term will likely be enforced.

– But, if the provision contains indicators of a penalty or threat to secure performance or is optional (contains the word “option” or gives the non-breaching party the option of pursuing actual damages OR liquidated damages), it will likely be struck down.