Contracts
Liquidated Damages
Definition
A liquidated damages clause is a contractual provision that fixes the amount of damages to be paid in the event of a breach. The clause is enforceable if the amount is a reasonable estimate of anticipated harm at the time of contracting and actual damages would be difficult to calculate. If the amount is disproportionately large, courts may strike the clause as an unenforceable penalty.
Example
A construction contract provides that the contractor will pay $500 per day for late completion. A court will evaluate whether $500 reasonably approximates the owner's daily losses.