Liquidated Damages

What Are Liquidated Damages?

Liquidated damages (LDs) are a predetermined amount of money or a formula to calculate such an amount, agreed upon by parties in a contract. This amount is to be paid by one party to another in the event of a breach of contract, particularly when actual damages are difficult to quantify or prove. Liquidated damages serve as a fair estimate of potential losses and are intended to compensate the injured party for intangible or hard-to-define damages.

Key Features of Liquidated Damages

• Predefined Amount: The amount of liquidated damages is specified in the contract before any breach occurs.
• Compensation for Intangible Losses: These damages are used when actual losses are difficult to measure, such as the loss of trade secrets or missed deadlines.
• Fair Representation: Courts require that the amount of liquidated damages be reasonable and not punitive at the time the contract is signed.
• Contractual Agreement: Both parties must agree to the liquidated damages clause before entering into the contract.

Examples and Applications

• Construction Contracts: Often include liquidated damages for delays, specifying a daily rate for each day past the completion date.
• Real Estate Transactions: Used to protect parties from excessive fees in case of a contract breach.
• Trade Secrets: In cases like the disclosure of source code, liquidated damages can compensate for the loss of trade secret value.

Liquidated damages are a legal tool to provide clarity and certainty in contractual relationships, helping to avoid lengthy litigation over damages. However, courts will not enforce liquidated damages if they are deemed punitive or unreasonable.