Liquidating the Damages From Legalese
Lawyers sometimes speak in a seeming foreign language called legalese. Just like other professionals, lawyers use certain words or phrases as shorthand to refer to complex concepts or doctrines. That’s fine when lawyers are talking to each other. It can be frustrating when the lawyer is talking to a client who has no idea what is being said.
It can be downright dangerous if you happen to be signing a legal document, such as a contract, and you don’t understand a technical word or phrase and are too embarrassed to admit it.
Demand Explanations
Don’t let your embarrassment stop you. If you have a lawyer, you should demand explanations in simple English. In case you can’t find a lawyer you understand or you can’t afford one, occasionally I will try in this column to explain some legal “terms of art.”
Today, let’s explore a concept from the law of contracts: liquidated damages.
Liquidated damages is a way for the parties to a contract to decide in advance on the amount of damage that will arise if the contract is breached (broken). It is only valid when it is impractical or extremely difficult to fix the actual damage that will arise from a breach and when the amount set for liquidated damages is a fair and reasonable estimate by the parties.
A liquidated-damages provision is frequently found in contracts to purchase real estate. The buyer and seller agree that it will be difficult to determine how much the seller will lose if the buyer backs out of the deal, or vice-versa.
After all, the seller may be able to sell the property later for the same price and will hardly be damaged at all or it could take months to find a new buyer at a lower price.
And if the seller breaches the agreement, the buyer won’t get the house or property he wanted. His damages are truly speculative, especially because the law generally assumes that real estate is unique and irreplaceable, unlike a consumer product, such as a TV set, which has an easily determined value.
In a liquidated-damages provision, the buyer and seller agree that the party at fault (the one who breaks the agreement) will pay a set amount, and then they don’t have to fight later about how much was lost. (They may still fight about who was at fault.)
In layman’s terms, this might be described as forfeiture of the deposit because the liquidated-damages amount sometimes corresponds to the amount of the deposit.
If a court finds that the amount is actually a penalty, above a fair and reasonable estimate, the provision may be held invalid.
In fact, when it comes to residential property, the California Civil Code says a liquidated-damages amount that exceeds 3% of the purchase price is invalid unless you can prove that under your special circumstances the amount is reasonable.
The impact of a valid liquidated-damages provision can be quite severe, as demonstrated in a recent California Court of Appeal case. The owner of a San Diego coin and stamp store contracted with a security firm for burglar and fire alarm service.
The contract contained a liquidated-damages provision, which noted that it was extremely difficult to fix the damages that might result from a failure of the security firm to do its job, and that the firm was not being paid enough to provide insurance for any possible loss. The amount of liquidated damages was set at $250 in the contract.
Didn’t Take Action
In August, 1980, burglars entered the store, after cutting the telephone line that ran the alarm system, and stole almost $1 million in coins and stamps. Although the security firm learned of the interruption in telephone service, it took no action to protect the store, according to the court.
The store owner sued the security firm to recover its extensive losses, but in May the Court of Appeal ruled that the firm only had to pay $250 because of the liquidated-damages provision in the contract.
So you see, it could literally cost you hundreds of thousands of dollars if you sign a contract with legal terms you don’t fully understand.
If you come across a particular legal word or phrase that you want explained, write to tell me about it, and I will try to discuss it in a future column.
Klein cannot answer mail personally but will respond in this column to questions of general interest about the law. Write to Jeffrey S. Klein, Legal VIEW, The Times, Times Mirror Square, Los Angeles 90053.
