Liquidated Damages

Liquidated Damages

In terms of credit card processing, liquidating damages generally works in the favor of the processing company and tends to be tucked in the fine print of the initial contract.

They refer to early termination on the part of the client. The general manner this is worded in the contract is that the client party will pay out the remainder of the contract at the average monthly amount paid to that point in the contract.

Credit card processing companies that still use this clause in their contracts are trying to lock their clients into the full term of the contract.

Although there can be penalties, some clients weigh the cost of staying with the processing company against their early termination penalty.

If that client is already nearing the end of their contract it may prove beneficial to break the contract, pay the penalty, and move on to a company offering a better rate.

Since 1995 this clause has been on the decline in the contracts presented by most processing companies. In that year, the California court overturned liquidated damages in a class-action suit that awarded the plaintiffs millions of dollars.

After that overturning, many companies have dropped the liquidated damages clause from their contracts. In the long run, it had the potential to cost them more money than it was worth.

When these clauses are still used, they tend to be vague in their wording so that the company can assess the largest penalty possible on the departing client.

The liquidated damages clause is generally considered an undefined amount since it is technically impossible to calculate what a client’s charges would be at any given time. The processing company can assess the penalty because they can prove they are losing business.

How much business is the true gray area?

They use the average, but many other factors can come into play. On the other hand, a client can fight the charges if they have a case in which the amount is unreasonable.

The easiest way to avoid running into these problems and having to take an issue like this to court is to give the contract a thorough read-through.

However, the client needs to make sure they understand everything they are reading. A liquidated damages clause is just one of several ploys used by some of the less reputable processing companies.

Clients should be aware of what they are signing and any time they come across vague clauses referring to undefined penalties, they should take their business elsewhere.