Liquidated Damages

In one sentence

A fixed amount both parties agree in advance the breaching party must pay.

Plain English

Instead of fighting over how much harm a breach causes, parties can agree upfront on a set penalty amount. This is liquidated damages—a predetermined sum written into the contract that becomes due if someone breaks it. The amount must be a reasonable estimate of actual harm, not a punishment. Courts won't enforce it if it's obviously excessive or designed to punish rather than compensate.

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Example

A wedding venue contract states that if the couple cancels within 30 days of the event, they forfeit $5,000. If they cancel with two weeks' notice, they owe that $5,000 as liquidated damages, not whatever the actual loss turns out to be.

Used in a sentence

“The construction contract included a liquidated damages clause requiring the contractor to pay $500 per day for every day the project ran late.”

Related terms

Penalty Clause

A contract provision imposing a fixed monetary punishment for breach, regardless of actual damages.

Breach

A failure to do what a contract requires, such as not paying or not delivering.

Enforceability

The legal ability to compel someone to follow through on a contract's terms in court.

Good Faith

An obligation to act honestly and fairly in performing or enforcing a contract.

Terms and Conditions

The specific rules and requirements that govern a contract or agreement.

Offer

A proposal to enter into a binding agreement on specific terms.

Acceptance

Agreeing to the exact terms of an offer, creating a binding contract.

Consideration

Something of value exchanged by each party to make a contract binding.

This page is a plain-English reference and is not legal advice. Laws vary by jurisdiction and change over time. For specific situations consult a licensed attorney.