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Court Watch

By By Rosaleen Chou
October 30, 2008

Over the years, liquidated damages clauses have continually been the subject of judicial controversy. In the franchising context, a liquidated damages clause is intended to represent an agreement between the parties as to what amount a franchisee should pay to a franchisor when the franchise agreement is terminated before its expiration, usually as a result of a breach of the agreement by the franchisee. The general rule is that payments required under liquidated damages clauses must be a reasonable approximation of the actual damages that might have been occurred, rather than a penalty.

Generally, courts have enforced liquidated damages in franchise agreements more often than not, but they have kept a close eye on these agreements, looking out for overreaching terms by the franchisor. The exact parameters as to what is unreasonable, and what is not, have been moving targets.

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