Contract Glossary
Liquidated Damages
Definition
Liquidated damages are a pre-agreed penalty written into the contract — 'If you're late, you owe $500 per day.' Both parties agree to the amount upfront, so there's no argument about damages later. But the amount has to be reasonable, or courts will throw it out.
In Practice
A construction contract for a $2 million office renovation includes a liquidated damages clause: $1,000 per day for every day past the deadline. The project runs 45 days late. The contractor owes $45,000 in liquidated damages, no questions asked. But if the clause said $50,000 per day — clearly punitive given the project size — a court would likely void it as an unenforceable penalty.
Example Clause
In the event of delay in delivery beyond the agreed-upon deadline, the Service Provider shall pay the Client liquidated damages in the amount of $500.00 per calendar day of delay, up to a maximum of 10% of the total contract value. The Parties acknowledge that this amount represents a reasonable estimate of the damages likely to be suffered by the Client and is not intended as a penalty.
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Frequently asked questions about liquidated damages
Liquidated damages are a reasonable pre-estimate of the harm a breach would cause. A penalty is an excessive amount designed to punish. Courts enforce the former and void the latter. The test: was the amount reasonable when the contract was signed, and are actual damages hard to calculate? If yes to both, it's likely enforceable.
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Create your contractThis content is for informational purposes only and does not constitute legal advice. For contracts with significant financial or legal implications, review by a qualified attorney is recommended.