Liquidated damages
A fixed amount agreed in advance that a party must pay if it breaches a specific obligation, such as missing a delivery deadline.
What it means
A liquidated damages clause sets the compensation for a specific breach before anything goes wrong. Instead of proving actual losses, the injured party collects the agreed amount. It is common for late delivery, missed construction dates, and early cancellation.
A caterer’s contract might say that if the caterer cancels within 30 days of an event, it owes the client $2,000. Both sides gain certainty: the injured party avoids a hard fight over damages, and the breaching party knows its exposure for that breach.
Courts will not enforce a liquidated damages clause that works as a penalty, meaning an amount meant to punish or deter rather than to estimate loss. The general US approach asks whether actual damages were hard to predict at signing and whether the amount was a reasonable estimate of likely harm. How strictly this is applied varies by state and country, and some courts also compare the amount to the actual loss. A figure clearly out of proportion risks being thrown out entirely.
What to watch for
- Compare the amount to a realistic estimate of the actual loss, since a figure far above it may be an unenforceable penalty and one far below it may undercompensate you.
- Check whether liquidated damages are the only remedy for that breach or come on top of actual damages and termination rights.
- Look for a cap on amounts that accumulate, such as per-day delay charges, and whether they count toward the overall liability cap.
- Confirm what triggers payment, and whether delays you caused or force majeure events are excluded.
Example clause
If Supplier fails to deliver the Equipment by the Delivery Date, Supplier will pay Buyer liquidated damages of $250 per day of delay, up to a maximum of 10 percent of the Contract Price. The parties agree this amount is a reasonable estimate of Buyer’s losses, which would be difficult to calculate, and is not a penalty.
Late delivery costs the supplier $250 a day, capped at 10 percent of the price, instead of whatever the buyer could prove.