A liquidated damages provision fixes the amount payable on breach. Enforceability generally requires that actual damages were difficult to estimate at contracting and that the stipulated amount was a reasonable forecast of probable loss.
Amounts grossly disproportionate to anticipated harm are unenforceable as penalties.
Alternative Names:
Liquidated Damages, Stipulated Damages Clause
Why it Matters?
These clauses provide certainty and avoid the proof problems that defeat many damages claims, which is their principal value. The enforceability analysis is where litigation concentrates, and the timing of the reasonableness assessment matters: most states evaluate the forecast as of contracting rather than in hindsight, so a clause is not invalidated merely because actual damages turned out to be smaller.
Frequently Confused with
Related terms
Frequently asked questions
When is a liquidated damages clause unenforceable?
Is reasonableness measured at contracting or after breach?
