You or your business may wish to sign a contract for services, or a lease contract for office space or for machinery. Contracts are usually for a certain term or length of time. After you enter the contract it may be that you are not happy with the other party and that you feel you are not receiving what you were promised when you signed the contract. You voice your complaint and then put them in writing. However, your complaints fall on deaf ears. Finally you are fed up and cancel the contract.
Before canceling (or really, entering into) a contract, beware of any ?liquidated damages? provisions that may apply. By cancelling a contract before it ends, you may be considered in breach of the contract and may be liable for significant money because of a ?liquidated damages? clause.
Liquidated damages are a set amount of payment for damages to the other party for your action of terminating the contract before it ends. Liquidated damages clauses are often inserted to a leasing or service contract. This clause takes effect if you terminate the contract without what the other party considers a valid reason. Wording in the clause may state that you agree it is impracticable and difficult to determine the damages the other party will suffer if you terminate the contract before it ends and the clause may also provide factors to determine the damages. Common factors may include expenses relating trying to lease the equipment or premises to another person, potential loss of income, and expenses incurred to provide the services to you or to provide services to another person.
If the liquidated damages clause provides for too large an amount for damages, courts may rule the liquidated damage clause is simply punitive – a penalty provision – and therefore unenforceable.
It is always recommended you have an attorney review a contract before signing. You may be able to eliminate the liquidated damage clause through negotiation before signing the contract or at lease reduce the amount of stated damages. It is important, however, to carefully read each provision of a contract before entering into it.
If you want to cancel a contract before it ends, consult with your attorney to determine your obligations, potential adverse effects and the best ways to end the contract.
Leonard Schneider is a partner in Liles Parker PLLC in the Houston, Texas office. The firm focuses on health care audits, business contracts, general corporate and business litigation matters and municipal law. He can be contacted at firstname.lastname@example.org or at the firm website www.lilesparker.com. The Houston office number is 713-432-7474