Pursuant to O.C.G.A. § 13-6-7, parties may agree to set liquidated damages for breach of the contract “unless the agreement violates some principle of law.” In Georgia, for a valid liquidated damages provision to be enforceable three factors must exist: (1) the injury must be difficult to estimate accurately; (2) the parties must intend to provide damages instead of a penalty; and (3) the sum must be a reasonable estimate of the probable loss. Three Georgia Supreme Court cases helped to establish these rules.
In Sanders v. Carter, 91 Ga. 450, 17 S.E. 345 (1893), the Georgia Supreme Court considered an agreement that stipulated deposit of $150 payable upon the failure to convey a certain parcel of real estate was intended by the parties as liquidated damages, not a penalty, and in the absence of any evidence that the sum was unreasonable or excessive the whole amount could be recovered as liquidated damages. In this case, Judge Lumpkin addresses the distinction between a penalty and liquidated damages at considerable length.
In Heard v. Dooley County, 101 Ga. 619, 28 S.E. 986 (1897), the Georgia Supreme Court considered a delay claim arising from the construction of the Dooley County Courthouse. In their construction contract, the parties agreed that the contractor would pay the County $32 as liquidated damages for every week of delay beyond the scheduled completion date. The Georgia Supreme Court first considered whether the liquidated sum should be considered an illegal penalty. The measure of damages for a breach of contract is the amount of damage sustained. The amount agreed between the parties must be reasonable, and intended to compensate the injured party for its actual damages. If some larger amount is stipulated in excess of actual damages sustained, the claim is in the nature of a forfeiture, and the court will ignore what the parties called the damages and will treat the claim as an illegal penalty. The court determines the intention of the parties from looking at the entire contract, not just what the parties called the damages.
In City of Washington v. Potomac Engineering & Construction Co., 132 Ga. 849, 65 S.E. 80 (1909), Potomac agreed to construct a waterworks system for the City of Washington, Georgia. The parties agreed to a completion date in their contract, and stipulated that the sum of $20 per day would be due as liquidated damages for each day of delay beyond the completion date. In finding the amount at issue to be liquidated damages, not a penalty, the Georgia Supreme Court reasoned that it would be difficult or impossible to ascertain the amount of actual damages sustained by the delay, and that there was nothing in the record that showed the stipulated amount of damages was unreasonable.
These early Georgia case provided the foundation for the modern law of liquidated damages in Georgia.