Liquidated Damages

What Are Liquidated Damages? Liquidated damages are a fixed sum or formula specified in a contract that represents the parties' best estimate of the damages that would result from a particular breach. These provisions are used when actual damages would be uncertain, difficult to prove, or impractical to calculate at the time of contract formation. ## Enforceability Requirements Courts will enforce a liquidated damages clause if: - The anticipated damages were difficult to estimate at the time of contracting - The amount is a reasonable forecast of the harm caused by the breach - The provision is not designed to punish the breaching party ## Liquidated Damages vs. Penalties A critical distinction exists between enforceable liquidated damages and unenforceable penalty clauses. If a court determines that the stipulated amount is grossly disproportionate to the actual or anticipated harm, it may strike the provision as an unenforceable penalty. The reasonableness of the amount is typically assessed at the time of contract formation, not at the time of breach. Common examples include per-day charges for construction delays and early termination fees in service agreements.