Free US Law Dictionary

Liquidated Damages

Liquidated damages (also referred to as liquidated and ascertained damages) are damages in which that the amount recoverable in the event of a specified breach (e.g., late performance) is agreed at the date of a contract. In such circumstances a liquidated damages provision will be included in the contract. When damages are not predetermined/assessed in advance then the amount recoverable is said to be 'at large' (to be agreed or determined by a court or tribunal in the event of breach).

At common law, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause). One reason for this, it could be said, is that the enforcement of the term would, in effect, require an equitable order of specific performance. However, courts sitting in equity will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment of the enforcing party.

In order for a liquidated damages clause to be upheld, two conditions must be met. First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term. Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages. Damages that are sufficiently uncertain may be referred to as unliquidated damages, and may be so categorized because they are not mathematically calculable or are subject to a contingency which makes the amount of damages uncertain.

For example, suppose Joey agrees to lease a storefront to Monica, from which Monica intends to sell jewelry. If Joey breaches the contract by refusing to lease the storefront at the appointed time, it will be difficult to determine what profits Monica will have lost, because the success of newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for Monica to insist upon a liquidated damages clause in case Joey does indeed fail to perform.

In the case of construction contracts, courts have occasionally refused to enforce liquidated damages provisions, choosing to following the Doctrine of Concurrent Delay when both parties have contributed to the overall delay of the project.