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Contracts: Liquidated Damages, Penalty Clauses

In a breach of contract action, the plaintiff must prove that the other side not only breached the contract, but also that plaintiff was harmed as a result of the breach. The burden of proving that damages exist and the amount of those damages rests with the plaintiff. Ullrich v. CADCO, Inc., 244 S.W.3d 772, 779 (Mo. Ct. App. 2008).

A liquidated damages clause in a contract is a provision which sets forth the amount of the damages in case of breach. However, those damages still are not automatic because Missouri law requires a showing of actual harm to trigger a liquidated damages clause. Charlie’s Chevrolet, Inc., 672 S.W.2d 177, 179 Mo. Ct. App. 1984). This is so because liquidated damages clauses are enforceable, but penalty clauses are not, and without evidence of damages, a liquidated damages clause generally becomes a penalty and is unenforceable. Strouse v. Starbuck, 987 S.W.2d 827, 829 (Mo. Ct. App. 1999).

Therefore, in drafting, construing, or litigation contracts, it is important to grasp the distinction between penalty clauses and liquidated damages clauses. Contact us with other questions relating to contracts.