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Do you want to include an amount of damages in your agreement? Do you know if your damages equate to a genuine pre-estimate of loss or a penalty? Do you know whether or not the damages you are claiming will be enforceable? Have you spoken to a business lawyer about how to go about drafting this into your agreement?

Many businesses include a sum for damages in their various business agreements.

For example, if you are running a design business, you may wish to set out, in your client agreement, that if the client poaches one of your designers, the client must pay to you a sum of $10,000.00. If the client does poach one of your designers, but does not pay this sum to you, you can take legal action against the client and demand that this amount be paid.

What dictates the enforceability of this clause?

Whether or not the amount of damages you indicated in your client agreement is enforceable by the courts is dependent on the circumstances of each case. However, it is much more likely to be enforceable, if you are able to show that the damages are a genuine pre-estimate of loss. ‘Genuine damages’ means that the amount of damages you are claiming is reflective of the loss that you suffered as a result of the breach, and is not purely contained within the client agreement to penalise the client.

Damages which are not a genuine pre-estimate of loss and found to be excessive or disproportionate may be held by the court to be a penalty and, therefore, unenforceable. To increase your chances of having your claim for damages upheld, it is important that, when you calculate possible damages, you act in good faith, and provide an honest estimate of the losses that were suffered. It would also help if you can clearly set out the formula used to calculate such damages.

Following from the example above, for you to establish the damages as a genuine pre-estimate of loss, you could argue that the damages were calculated based on the cost of seeking a recruiter to source a new designer and expenses involved in training the new designer.

Conclusion

If you have any disputes with a client, or would like to take legal action against a client for damages, you should first have a discussion with an experienced business lawyer. A good business lawyer will be able to provide you with advice and options based on your circumstances, and may be able to assist you in resolving your dispute without having to go to court.

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