What Is the Meaning of Liquidated

Damages?
By Pixie Alexander, eHow Contributor
updated: April 20, 2010

Liquidated damages compensate a party to a contract when specific things don't go as expected.
In contract law, the parties to a contract may agree upon an amount of "liquidated
damages" one party must pay the other if it fails to uphold a certain obligation under the
contract. Liquidated damages are intended to protect parties against the damage that could
occur if certain obligations aren't met on time.
Definition
1. According to Cornell University's Legal Information Institute, liquidated damages are
damages, usually paid in cash, for the breach of a specific contract provision. For
instance, if a supplier agrees to deliver machine parts to a buyer by April 15, but
does not deliver them until April 16, the supplier may be liable for liquidated damages
if the April 15 deadline was a vital part of the contract.
Contract Clauses
2. As Cornell University's Legal Information Institute also notes, liquidated damages
clauses are frequently included in contracts. They offer a way for parties to "insure"
themselves against a particular breach. For instance, a machine parts buyer may
insist on a liquidated damages clause that states the supplier will pay a certain
amount of money if the supplier fails to deliver the machine parts by a certain date.
The money is intended to compensate the buyer for lost sales and other losses that
will occur if the buyer doesn't have the parts in time.
Actual Damages
3. Liquidated damages are a special type of actual damages, according to Free Legal
Encyclopedia. That is, they are damages paid for a breach that actually occurred.
They are not intended to be punitive damages, or damages that punish the breaching
party.

Courts will generally uphold reasonable liquidated damages clauses, but will not
 usually uphold clauses that appear to impose punitive damages. For instance, a
court might uphold a liquidated damages clause that says the machine parts supplier
must pay for the amount of the sales the buyer would likely lose by not having the
parts in time.

The court might not, however, uphold a clause that says the supplier must pay five
times the amount of the lost sales. This is because the amount of the lost sales is
damage that actually occurred to the buyer, but five times that amount
overcompensates the buyer and punishes the seller, instead of merely making things
the way they would have been without a breach.
Uncertain Damages
4. According to Cornell University's Legal Information Institute, in addition to covering
actual damages, a liquidated damages clause must also cover damages that could
not be ascertained at the time of breach. If the amount of damages is ascertainable,
a liquidated damages clause will be struck down in favor of a judgment that the
breaching party should pay the actual, ascertained damages amount.

For example, if the machine parts supplier fails to give the buyer the parts in time,
and the buyer knows he lost exactly $100,000 in sales by not having the parts, the
court will likely require the supplier to pay the $100,000 instead of the amount listed
in the liquidated damages clause. However, if the buyer cannot know exactly how
much in sales he'll lose, but knows he usually makes about $100,000 in sales, the
court will uphold the liquidated damages clause as long as the clause requires
damages of in the $100,000 range.
Advantages
5. According to the Free Legal Encyclopedia, liquidated damages clauses in contracts
offer several advantages. First, they provide a firm number so that both parties can
figure the cost of a possible breach into their arrangement. Second, they provide a
kind of "insurance" against possible breach. Third, they allow the parties to agree on
damages without having to go to court, which saves the parties time and court costs.

Read more: What Is the Meaning of Liquidated Damages? |

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Liquidated damages are a payment agreed to by the parties of
a contract to satisfy portions of the agreement which were not
performed. In some cases liquidated damages may be the
forfeiture of a deposit or a down payment, or liquidated
damages may be a percentage of the value of the contract,
based on the percentage of work uncompleted. Liquidated
damages are often paid in lieu of a lawsuit, although court
action may be required in many cases where liquidated
damages are sought. Liquidated damages, as opposed to a
penalty, are sometimes paid when there is uncertainty as to
the actual monetary loss involved. The payment of liquidated
damages relieves the party in breech of a contract of the
obligation to perform the balance of the contract.
LIQUIDATED DAMAGES
When the parties to a contract agree to the payment of a certain sum as a fixed and agreed
upon satisfaction for not doing certain things particularly mentioned in the agreement, the
sum is called liquidated damages.

The amount of money specified in a contract to be awarded in the event that the
agreement is violated. The fixed amount which a party to an agreement promises to pay
to the other, in case he shall not fulfill some primary or principal engagement into which
he has entered by the same agreement.

The damages will be considered as liquidated in the following cases:

When the damages are uncertain and not capable of being ascertained by any satisfactory
or known rule

whether the uncertainty lies in the nature of the subject itself or in the particular
circumstances of the case;

When, from the nature of the case and the tenor of the agreement, it is clear that the
damages have been the subject of actual and fair calculation and adjustment between the
parties.

It differ from a penalty which is a forfeiture from which the defaulting party can be
relieved. An agreement for liquidated damages can only be when there is an engagement
for the performance of certain acts that if not done would injure one of the parties or to
guard against the performance of acts that would be injurious if done. In such cases an
estimate of the damages may be made by a jury, or by a previous agreement between the
parties who foresaw the consequences of a breach of the engagement and stipulated
accordingly. The civil law generally agrees with these principles.
Generally the sum fixed upon will be considered either liquidated damages or a penalty
according to the intent of the parties. The use of the words 'penalty,' 'forfeiture,' or
'liquidated damages,' will not be decisive of the question if the instrument, taken as a
whole, discloses a different intent.

Rules have been adopted to ascertain whether the sum agreed upon is to be considered a
penalty or liquidated damages.

It Has Been Treated As Penalty: 1. Where the parties in the agreement have expressly
declared the sum intended as a forfeiture or a penalty, and no other intent can be collected
from the instrument; 2. Where it is doubtful whether it was intended as a penalty or not,
and a certain debt or damages less than the penalty is made payable on the face of the
instrument; 3. Where the agreement was evidently made for the attainment of another
object, to which the sum specified is wholly collateral; 4. Where the agreement contains
several matters of different degrees of importance, and yet the sum named is payable for
the breach of any, even the least; 5. Where the damages are capable of being certainly
known and estimated.

It Has Been Considered As Liquidated Damages: 1. Where the damages are uncertain,
and are not capable of being ascertained by any satisfactory and known rule; 2. Where,
from the tenor of the agreement or the nature of the case, it appears that the parties have
ascertained the amount of damages by fair calculation and adjustment.

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