Liquidated damages are a commonly used form of contract stipulation, both for businesses and for individuals. In many cases, parties to a contract recognize that in the event of a breach, it can be difficult or impossible to quantify the amount of damages that need to be paid, in which case a liquidated damages clause can be helpful.

The clause itself is an estimate of what each party feels is a fair and reasonable payment to the non-breaching party in the event of a breach of contract. This helps to ensure that, should a breach of contract occur, the non-breaching party will still receive a predictable and fair payment. This is especially beneficial to the non-breaching party as they are not relying on the discretion of the court or on an incredibly hard-to-measure amount that could leave their damages unrecovered.

When drafting the liquidated damage clause, contract parties must take special care to ensure that the damages are reasonable and fair, based on the best estimates of the parties at the time the contract was signed. Otherwise, the clause could be deemed invalid or unenforceable. Different jurisdictions may require different approaches to this clause and some might only allow liquidated damages if the damages themselves are considered “difficult to calculate”, while others might set strict caps or limits on what can be requested as liquidated damages.

In cases where the liquidated damage clause fails to be accepted by the court, these cases can become more time-consuming and complex for both parties involved. In some cases, the court may order to have the clause replaced by a contractual damages clause that is more in line with the parties’ original intentions and expectations.

In short, liquidated damages are a useful tool for ensuring that an appropriate amount of damages occurs if a breach of contract occurs. Prior to signing a contract potentially containing a liquidated damage clause, it is essential for parties to understand the circumstances and potential consequences needed to create a valid and enforceable provision. Through understanding and adhering to these circumstances, parties can avoid difficulty and conflicts further down the line.and ultimately receive their due damages in the event of a breach of contract.