What Does “Liquidated Damages” Mean in a Contract?
A pre-agreed amount of damages that will be paid if a specific breach occurs, instead of calculating actual damages.
Detailed Explanation
Liquidated damages are predetermined compensation amounts set in the contract. They specify exactly what will be paid for certain breaches - typically where actual damages would be hard to calculate. Late delivery penalties are common examples.
For liquidated damages to be enforceable, they must be a reasonable estimate of anticipated harm, not a punishment. Courts may refuse to enforce amounts that are clearly excessive or punitive.
Example in a Contract
“For each day of delay beyond the delivery deadline, Contractor shall pay liquidated damages of $500 per day, up to a maximum of $25,000. The parties agree this amount represents a reasonable estimate of Company's damages from delay.”
Why It Matters
Liquidated damages make breach costs predictable. You know exactly what you'll pay (or receive) if certain breaches occur. But be careful - they apply even if actual damages are lower or higher than the specified amount.
Related Terms
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