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What is a liquidated damages clause in a contract?

On Behalf of | Jul 5, 2022 | Contract Disputes

When you enter a contract with another party, you expect them to deliver on their part. However, it is necessary to anticipate a situation where they may not perform as expected. In such a case, you deserve compensation for the breach of contract, and that’s where a liquidated damages clause comes in.

In a nutshell, a liquidated damages clause specifies a predetermined amount of money a party must pay if they breach a contract.

When do liquidated damages apply?

Liquidated damages are appropriate in contracts where the damages caused by a breach are difficult to prove or quantify and where there are no better alternative remedies to compensate the other party for the losses or harm suffered. 

In addition, the amount of damages should be proportionate to the harm incurred since they are supposed to compensate for a loss, not penalize the breaching party.

Is a liquidated damages clause enforceable?

You may have such a clause in your contract, but is it enforceable in a court of law? The short answer is that it depends. For instance, if the amount is unreasonable and too high compared to the losses suffered by the non-breaching party, the clause may not be enforceable.

Similarly, if the damages were ascertainable during the formation of the contract, a liquidated damages clause may not be enforceable.

Should you include a liquidated damages clause in your contract?

Whether or not to include it requires a careful analysis of the kind of contract you are getting into. A liquidated damages clause can save you a lot of time and money that would have been spent pursuing damages for a breach of contract. 

If it applies, you need to ensure that the clause is properly drafted to ensure its enforceability in case of a breach.