Liquidated damages clauses are contract terms that set forth in advance the amount of monetary damages due for a breach of the contract. In the matter of KOLD, LLC v. Croman, No. N13C-05-249, Johnston, J. (Nov. 25, 2014), the Superior Court was asked to examine a liquidated damages clause contained in an employment contract. Employer, KOLD, alleged that its prior employee, Croman, breached their employment contract. KOLD sought to recover $35,000 pursuant to a liquidated damages clause, which provided:
Termination of this Agreement by Employee, for any reason, prior to the expiration date of this Agreement or any renewal thereof, will cause loss to the Employer, including but not limited to, lost productivity/revenues/ratings, increased operating costs, loss of training/promotion provided the Employee, as well as costs in advertising, interviewing and other associated costs related to replacing the employee. The parties acknowledge however, that such costs are difficult to ascertain, calculate and foresee. Therefore, the parties agree that, in the event of breach of this contract on the part of the Employee, the Employee shall pay to the Employer, the sum of $35,000 dollars. Such payment is not a penalty but is for liquidated damages sustained, it being mutually agreed and understood between the parties hereto that such amount is reasonable as liquidated damages.
Croman challenged the enforcement of the clause arguing that it was a penalty and therefore violated Delaware law.
The Court noted that liquidated damages clauses are presumptively valid and enforceable in Delaware. However, these clauses are not enforceable if the damages are a penalty rather than compensatory. Liquidated damages will not be viewed as a penalty if: (1) at the time of contracting, damages were difficult or impossible to determine; and (2) the stipulated amount of damages found in the contract reasonably estimates the damages that would likely be caused by a breach, or the stipulated amount of damages is reasonably proportionate to the damages that have actually been caused by the breach. The Court upheld the clause and KOLD's claim finding that damages were difficult to ascertain at the time the contract was formed and the sum of $35,000 was was a reasonable forecast of damages.
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