Liquidated Damages Clause

From the Latin from Latin 'liquidus,' meaning clear or settled, and 'damnum,' meaning loss or damage.

In one sentence

A contract provision that sets a fixed amount of money owed if one party breaches, instead of leaving damages to be calculated later.

Plain English

When someone breaks a contract, they owe damages—money to compensate the other party for the loss. Normally, the injured party has to prove how much harm they suffered, which can be complicated and uncertain. A liquidated damages clause avoids this by having the parties agree in advance on a specific dollar amount that will be owed if a breach occurs. This gives both parties certainty and avoids the need for a lengthy damages calculation. However, courts will only enforce a liquidated damages clause if the amount is a reasonable estimate of actual harm; if it's a penalty designed to punish the breaching party, courts may refuse to enforce it.

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Example

A wedding venue contract includes a liquidated damages clause stating that if the couple cancels within 30 days of the event, they owe $5,000. This is a reasonable pre-estimate of the venue's lost profits, so the clause is enforceable.

Used in a sentence

“The liquidated damages clause in the construction contract specified that the contractor would owe $1,000 per day for each day the project was delayed.”

Related terms

Contract

A legally binding agreement between two or more parties to do or not do something.

Breach of Warranty

Failing to fulfill a promise or guarantee made about a product or service.

Remedy

A legal action or payment a court awards to fix a harm or enforce a right after a breach.

Damages Calculation

The process of determining how much money a harmed party should receive for a breach.

Ad Damnum Clause

A contract section stating the maximum amount of damages one party can claim.

Boilerplate Clause

Standard, repetitive contract language used in many agreements without customization.

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.

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.