What You Should Know About Liquidated Damages in Small Claims Cases - dummies

What You Should Know About Liquidated Damages in Small Claims Cases

By Judge Philip Straniere

Liquidated in the case of small claims court doesn’t mean things being soled for bargain-basement prices, like it does on the late-night infomercials. Liquidated — and unliquidated — damages are specific types of damages that can affect whether or not you can sue and how much you can collect.

Agree ahead of time on liquidated damages

Liquidated damage clauses often show up in contracts. In these clauses, the parties agree in advance that they won’t sue each other if there’s a breach of the contract. They pick an amount of money both agree is a fair estimate of the damage each side suffers if the other side breaches the contract.

These cases sound like they would never end up in court because the settlement details are worked out ahead of time, but that’s not necessarily the case. First, both parties must agree which side caused the breach. If they do, there’s no need to go to court.

If they don’t, however, the party suing must prove the other party broke the contract. Even if the case is won, damages may be limited to the amount of the liquidated damage clause, even if the actual damages are more.

You can’t set the liquidated damage clause at such a high amount that the court may think it’s a penalty. The amount of the clause must be reasonable related to the damages suffered. If a court deems that the amount selected is a penalty, the court won’t enforce a liquidated damage clause.

What this means is that if you and the defendant can’t resolve the dispute without going to court, you’ll still have to prove your actual damages and hope they’re pretty close to the amount in the liquidated damage clause.

Suppose you’re interested in buying a piece of vacant land from the defendant for $100,000 but aren’t sure whether the town will permit you to build what you want on the property. You enter into a contract with the defendant that says that if you don’t close title in 60 days the parties agree that there will be liquidated damages of $5,000.

If you decide not to buy the property, and the seller sues you for breach, the court may honor the liquidated damage clause because $5,000 was about the amount of money he had to expend for the two months for real estate taxes and insurance.

If the seller breaches the contract and decides not to sell and you sue him for damages, the court may honor the $5,000 clause because it was pretty close to your actual expenses for an engineer or architect and other planning expenses.

In each case, so long as the actual damages were reasonable and related to the party’s actual loss, the court will honor the clause.

The difference between liquidated and unliquidated debts

Everyone is aware of the concept of debt — the idea that you owe someone money. But under the law, debt has two different classifications — liquidated and unliquidated. Liquidated debt may sound like something you’d run up at the local watering hole, but that isn’t correct. For clarification, read on:

  • A liquidated debt is an undisputed amount owed. It is a sum certain, which is a set amount owed.

    For example, you borrowed $1,000 at five percent interest. You didn’t pay anything. The plaintiff sues you and produces the note and the business record showing no payments. None of the facts is in dispute. You owe the money.

  • An unliquidated debt is an amount owed but the exact amount is in dispute; you need to prove the amount.

    In this example, you’re in a car accident and want to sue for the damage to your car. His insurance company says you’re to blame for the accident. You deny it. You have two estimates for the repairs, one for $1,500 the other for $1,600. The insurance company says the damages are only $1,200. This case has to be tried because the damages you suffered is in dispute.

One way the two types of debt differ has to do with payment of the debt:

  • If the defendant sends you a check for less than the total amount due marked “payment in full” of a liquidated debt and you accept it, it generally doesn’t cancel the entire obligation, because you’re owed a set amount and got something less than that. Unless you previously agreed in writing to such a settlement, you can still sue for the entire amount.

    Example time: You owe your credit card issuer $1,000. You send them a check for $10 marked “payment in full.” Do you really think this will effectively discharge your debt? Such a possibility would destroy commercial and credit transactions.

    At one time, the creditor had to reject the payment because it was marked payment in full. That’s no longer the law unless the creditor issues a written release acknowledging that he accepts that amount as payment in full. Now the law is that the creditor can accept and cash the check and you only owe $990.

  • If you accept a check in full payment of an unliquidated debt, the debt is discharged because the amount owed is in dispute.

    Say that after a fender-bender, you get out of your car and it looks like just your bumper is bent. The defendant says, “You don’t really want to put this through insurance do you? It’ll take time and jack our rates. I’ll give you $500 in full payment for damages.” You agree and take the check marked “payment in full for property damage car accident January 1.”

    You then take the car to the body shop where to your chagrin, you learn that the frame of the car is bent and it will take $5,000 to repair the car. Because this was an unliquidated debt, you’re out of luck. After you accept the check, the defendant is released from liability.