Instead of reaching for the checkbook in response to a bill or invoice that includes a penalty charge (for example, a late penalty, termination fee), you might first stop and give thought about whether the penalty amount is unenforceable (in this instance under Georgia law). Maybe you have a good legal argument against paying the penalty.
As a general rule, when a party does not meet all the requirements of a contract that party is said to “breach” the contract. When the breach occurs the next step typically is for the other party to seek damages resulting from the breach.
If the contract expressly refers to a penalty, such as a late-payment fee for example, that late payment penalty must satisfy the law as an appropriate component of damages. If the penalty fails to meet the requirement for damages, it is an unenforceable penalty. In other words, the mere reference in the agreement to a penalty is not sufficient alone to sustain the penalty.
I have used this unenforceable penalty argument successfully in a number of situations for me and for my clients. [After all, many of us lawyers when it comes to personal business affairs are like cobblers with their shoeless children.]
The term “liquidated damages” means that the damages resulting from a breach are specified in the contract as a specific dollar amount. This often is included in a contract in an effort to eliminate the need to prove-up evidence of actual damages (that would be called, by contrast, non-liquidated damages).
Under Georgia law, penalties or any other specified damage amounts are not enforceable unless valid as liquidated damages. See Physician Specialists in Anesthesia, P.C. v. MacNeill, 246 Ga. App. 398, 401 (2000); Caincare, Inc. v. Ellison, 272 Ga. App. 190 (Ga. App., 2005)
As expressed in the Physicians Specialists opinion, all three of the following factors are required for a penalty or other fee to constitute liquidated damages:
(i) A determination that actual injury or damages otherwise for the party seeking the penalty are difficult or impossible to estimate with accuracy;
(ii) The parties to the contract mutually intended to provide for liquidated damages; and
(iii) Assuming the parties intended to include an express liquidated damages provision in contract, the amount of the specified liquidated damages must be a reasonable pre‑estimate of a probable loss in the event of a breach.