Liquidated Damages Clauses: When They Hold Up in Michigan

The contract says that if the project is late, you owe $500 a day. Or that if a client cancels, they forfeit the whole deposit. Or that if an employee leaves early, they pay back a fixed amount. Then the deadline slips, the client walks, or the employee quits, and the question becomes whether that number actually means anything.

That number is a liquidated damages clause. Michigan courts do enforce them, but not automatically. A clause that looks like a fair estimate of the harm usually holds up. A clause that looks like a punishment usually doesn't. If you're writing one or facing one, our contracts practice can tell you which side of that line it falls on.

What a liquidated damages clause is

A liquidated damages clause sets, in advance, the amount one side will pay if it breaches the contract in a specific way. Instead of proving actual losses after the fact, the parties agree on the number up front.

Common examples:

• Delay damages in construction, software, or event contracts: a set amount per day or week the work is late.
• Cancellation fees in service, venue, and vendor contracts.
• Early termination fees in leases, equipment contracts, and memberships.
• Repayment clauses for training costs or signing bonuses if an employee leaves early.
• Deposit forfeiture when a buyer backs out.

The point is certainty. Some losses are real but hard to prove: lost goodwill, a missed season, a delayed opening. A liquidated damages clause lets both sides price that risk when they sign, instead of fighting about it later.

The line between damages and a penalty

Michigan courts will enforce a liquidated damages clause when it's a reasonable attempt to estimate the harm a breach would cause. They won't enforce a clause that's designed to punish the breaching party or scare them into performing.

In practice, courts tend to look at two things:

• Were damages hard to measure when the contract was signed? Liquidated damages make the most sense when actual losses would be difficult to calculate or prove.
• Is the amount reasonable compared to the likely harm? The number should be a fair forecast of the loss, not a figure picked because it would hurt.

If a clause fails those tests, a court can treat it as an unenforceable penalty. That doesn't erase the breach. The injured party can still try to recover its actual damages, but it loses the shortcut and has to prove its losses the usual way.

Courts also look at the clause as written when the contract was made. Labeling it "liquidated damages" doesn't save a penalty, and calling it a "fee" doesn't turn it into one.

Selling goods? There's a statute

For contracts for the sale of goods, Michigan's version of the Uniform Commercial Code addresses liquidated damages directly in MCL 440.2718. It allows them in an amount reasonable in light of the anticipated or actual harm, the difficulty of proving the loss, and how hard it would be to get an adequate remedy otherwise. A term fixing unreasonably large liquidated damages is void as a penalty.

The same section also deals with deposits a buyer forfeits when it breaches, which matters for businesses that take large deposits on product orders.

Signs a clause may be a penalty

Every clause depends on its facts, but these are common red flags:

• The same large amount applies to every breach, whether it's a one-day delay or a total failure to perform.
• The amount is far larger than any loss the parties could realistically have expected.
• The losses were easy to calculate, so there was no real reason to estimate them in advance.
• The clause stacks on top of actual damages, letting one side recover both.
• It only runs one way and looks designed to keep one party from leaving rather than to compensate the other.

None of these alone decides the question, but together they make a clause much harder to enforce.

How to write one that holds up

If you're drafting a contract, a few practices make a liquidated damages clause more likely to survive a challenge:

• Tie the number to something real. A daily delay amount based on rent, payroll, or lost bookings is easier to defend than a round number.
• Scale it to the breach. Per-day or tiered amounts track actual harm better than one lump sum.
• Explain why damages are hard to measure. A short recital in the contract helps show the parties thought about it.
• Decide whether it's the exclusive remedy. Say whether the liquidated amount replaces actual damages or is in addition to other remedies. Ambiguity here invites a fight.
• Consider a cap. A maximum total keeps a per-day amount from growing into something that looks punitive.

Liquidated damages often sit next to other risk-allocation clauses. Our posts on limitation of liability clauses and indemnification clauses cover the provisions that usually work alongside them.

If you're the one being charged

If someone is demanding a liquidated amount from you, don't assume the number is final just because it's in the contract:

• Read exactly what triggers it. The clause may not apply to what actually happened.
• Compare the amount to the real harm. If it's wildly out of proportion, it may be an unenforceable penalty.
• Check for related clauses. Notice requirements, cure periods, or termination rights can change the analysis.

Our guide on how to get out of a contract in Michigan covers related options, and our post on breach of contract deadlines in Michigan explains how long either side has to bring a claim.

Questions we hear often

Is a nonrefundable deposit a liquidated damages clause? Often it works like one. Whether it's enforceable can depend on how large it is compared to the seller's likely loss.

Can I charge a late fee on unpaid invoices? Late fees and interest raise similar reasonableness questions. A modest, clearly stated fee is much easier to enforce than a large one. Our post on getting paid when a client won't pay covers collection.

If the clause is thrown out, do I get nothing? Not necessarily. You can usually still pursue your actual damages, but you'll have to prove them.

Does a template contract's liquidated damages clause work? Sometimes, but the number in a template wasn't set with your business in mind. Our post on whether to use a template contract explains the risk.

When to call ELN

Call us before you put a liquidated damages, cancellation, or early-termination number in your contracts, and when someone demands one from you. We'll help you set a figure that can hold up, or tell you whether the one you're being charged is likely enforceable.

Working on a contract or facing a penalty-style demand? Schedule a consultation or visit our contracts practice.

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