Back to Glossary
What is a Liquidated Damages Clause?
Definition of Liquidated Damages
A liquidated damages clause sets a predetermined amount one party must pay if it breaches the contract—usually when actual damages are difficult to measure. This clause ensures predictability and discourages delays or nonperformance.
Common in construction, supply, and service contracts, liquidated damages must reflect a reasonable estimate of potential loss rather than a penalty.
Why Liquidated Damages Matter
Liquidated damages promote accountability and save both parties time and legal expense by predefining consequences for missed obligations. They also deter negligence and provide a fair mechanism for compensation when quantifying losses would be complex.
Poorly drafted clauses can be unenforceable if deemed punitive, so balance and clarity are essential.
Best Practices for Liquidated Damages
-
Base the amount on realistic, documented estimates of potential loss.
-
Specify the triggering event and method of calculation.
-
Ensure the clause doesn’t conflict with limitation of liability provisions.
-
Review regularly for reasonableness under evolving laws.
-
Avoid using punitive language that suggests a “fine.”
Example of Liquidated Damages in Practice
A construction contract imposes liquidated damages of $2,000 per day for every day the project extends beyond the agreed completion date.
Get Started with ContractSafe Today
