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Delaware Court Casts Doubt on the Enforceability of Liquidated Damages Provision in Technology Services Agreement

April 25, 2018

Liquidated damages provisions are common in many commercial contracts. Such provisions allow parties to determine in advance the measure of damages of a party that breaches the agreement. Not all such provisions are enforceable, however. Under Delaware law, determining whether a stipulated sum is a proper liquidated damages provision requires a two-part test. S.H. Deliveries, Inc. v. TriState Courier & Carriage, Inc., 1997 WL 817883, at *2 (Del. Super. Ct. May 21, 1997). First, are the reasonably anticipated damages difficult to ascertain at the time of contracting because of indefiniteness or uncertainty? Id. Second, is the amount stipulated either a reasonable estimate of future damages or reasonably proportionate to the damages that actually have been caused by the breach? Id. Both questions must be answered in the affirmative for a liquidated damages provision to be enforceable. Id.

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