Georgia Court of Appeals Revisits the Enforceability of Liquidated Damages Provisions in Atlanta Hospitality Investment, LLC v. Holiday Hospitality Franchising, LLC
Most commercial contracts are negotiated with performance in mind, but one common way parties manage the risk of nonperformance is through a liquidated damages clause—a provision that predetermines the amount of damages owed if a specified breach occurs. Properly drafted, these clauses can reduce uncertainty, avoid costly disputes over actual damages, and provide both sides with greater predictability. Improperly drafted, however, courts may strike them down as unenforceable penalties.
A recent decision from the Georgia Court of Appeals in Atlanta Hospitality Investment, LLC v. Holiday Hospitality Franchising, LLC illustrates where Georgia courts draw that line. After a hotel franchisee terminated a 20-year Holiday Inn Express license agreement roughly two years into the contract, it argued that the agreement’s liquidated damages provision constituted an unenforceable penalty. The court disagreed, enforcing the clause and affirming an award of nearly $2 million in liquidated damages. The decision provides a useful roadmap for understanding when Georgia courts will enforce liquidated damages provisions – and when they will not.
The statutory beginning point. Georgia's liquidated damages statute, O.C.G.A. § 13-6-7, is short and permissive: if the parties agree in their contract what the damages for a breach will be, "the parties are bound thereby"—unless the agreement "violates some principle of law." That last phrase does the heavy lifting. Contractual penalties violate a principle of law and, thus, Georgia courts will not enforce them. Contract damages are meant to compensate the injured party, not to punish the breaching one or scare it into performing.
The three-part test. To separate a legitimate estimate of contract damages from a disguised penalty, Georgia courts apply a three-factor test that traces back to the state Supreme Court’s 1976 decision in Southeastern Land Fund v. Real Estate World. Under that test, a liquidated damages provision is enforceable only if three conditions are met:
The injury is hard to measure. The harm from the breach must be difficult or impossible to estimate accurately. If actual damages are easy to calculate, there is no reason to pre-estimate them.
The parties intended damages, not a penalty. The contract must show the parties meant to compensate for loss, not threaten the other side into performing.
The sum is a reasonable pre-estimate. The stipulated amount must reasonably approximate the probable loss, judged as of the time the parties signed the contract—not the loss that actually occurred.
Fail on any prong, and the clause is a penalty a court will refuse to enforce.
How the court applied the test in Holiday Hospitality. The franchisee conceded the first prong—lost future franchise revenue is genuinely hard to pin down. On intent, the court leaned on the contract's own words. It expressly stated the damages were "not a penalty" and were the parties' "best estimate" of loss. Because the language was plain, the court would not let the franchisee introduce outside testimony to argue otherwise. On the third prong, the formula tied damages to the hotel's own historical monthly revenue, multiplied by 36 months—an estimate of how long it takes to find and ramp up a replacement franchisee. That was a reasoned method keyed to real performance, not an arbitrary flat fee or a windfall covering all 18 remaining years. With all three prongs satisfied, the clause stood.
The takeaway. The Holiday Hospitality decision reinforces that Georgia courts will not enforce liquidated damages provisions simply because the parties agreed to them. Courts enforce them if they reflect a reasonable effort, made at the time of contracting, to estimate damages that would be difficult to measure if a breach later occurs. For businesses and their counsel, the lesson is straightforward: a well-drafted liquidated damages provision should explain why actual damages would be difficult to calculate and tie the agreed-upon amount to a rational estimate of anticipated losses. Whether you are negotiating a contract or challenging one in litigation, the enforceability of the clause will often turn less on the dollar amount itself than on the reasoning behind it.