Liquidated damages are a contract provision that sets a predetermined amount or formula for damages if a specified breach occurs.
Why It Matters
These clauses matter because they can reduce uncertainty and avoid fights over measuring loss after breach. They are especially important when actual damages may be hard to calculate at the time the contract is made.
Where It Appears
The term appears in commercial agreements, construction contracts, service contracts, and other deals where the parties try to define the consequence of breach in advance.
Practical Example
A contract states that if one side misses a completion deadline, it must pay a set amount for each day of delay. That may be a liquidated damages clause if it reflects a reasonable estimate of expected harm.
How It Differs From Nearby Terms
Liquidated damages are agreed in advance. Ordinary damages are determined after a breach occurs. A penalty clause is different because contract law is often skeptical of provisions meant mainly to punish rather than estimate likely loss.
Related Terms
Knowledge Check
- When do parties usually set liquidated damages? They usually set them in advance, when the contract is formed.
- How do liquidated damages differ from a penalty? Liquidated damages are meant to estimate likely loss, while a penalty is aimed more at punishing breach.