Define Liquidated Damages

If you must define liquidated damages, it can come in the form of many actual damages. It can be a sum of money determined as the total compensation amount that an aggrieved party should receive, if another party violates certain components of an agreement. The agreement also determines the failures or actions that constitutes a violation. Such contracts entail an exchange of money or a promise to perform a service. If such promises or money exchanges are violated in some fashion, the aggrieved party is entitled to liquidated damages, and such stipulations can be included in contracts.

The purpose of such stipulations is to create a pre-established sum that must be paid to an aggrieved party in the event of contract violation. Parties in an agreement use liquidated damages where the actual damages, even though real, are impossible or hard to prove.

  • Note: Think of liquidated damages as a form of a contract performance insurance

Liquidated damages may not be imposed if a defendant can demonstrate that the liquidated damages clause was injected into the agreement as punishment for not keeping the agreement terms instead of coverage damages that are unprovable. Damages can be liquidated in an agreement under the following circumstances:

  • The injury is difficult to quantify or is uncertain
  • The amount is considered reasonable and factors in any potential harm that arises from a contract violation, including difficulties in proving a loss and the difficulty of finding another solution
  • The damages are structured in a manner that occurs as a damage instead of a penalty. If such criteria are not obtained, a liquidated damage clause would be void

Liquidated Damages Breakdown

In addition, liquidated damages are considered an amount that equals the injury extent that could occur if an agreement is violated. Such damages are assessed when an agreement is drafted and protects all parties that are part of the agreement. For instance, such an arrangement would benefit the following parties:

  • Employer and employee
  • Buyer and seller

For buyers, liquidated damage clauses limit losses if they are in default. Regarding sellers, they would establish a predetermined amount, which would usually entail the buyer depositing money, if a buyer defaults on the agreement. The liquidated damages clauses have changed in recent years, especially regarding enforcement.

There are times when liquidated damages stem from the deposit amount, down payment, or it is based on a formula (ex. 10 percent of an agreement amount). The party that’s not in default could get a judgment on the liquidated damages amount, which is rooted on a stipulation included in the agreement, unless a party who violated the agreement could make a suitable showing that an amount of liquidated damages was so egregious that an argument could be made for fraud of some kind.

Damages would be rendered liquidated in the following instances:

  • If an injury is uncertain or difficult to assess
  • Amount is rendered reasonable and assesses the actual harm that’s caused by an agreement breach
  • The losses are not easy to prove
  • The damages are established to serve as a damage and not a penalty
  • There is not a better solution

Damage Types

Unlike other damage types, such as punitive and actual damages, liquidated damages usually are factored in situations involving agreements. The parties to an agreement may also agree on the type of actions that would require liquidated payment damages. For example, a seller and buyer of widgets may agree that a seller would pay liquidated damages if he could deliver widgets on time, but only if he could deliver a correct widget number.

Penalties are sums that are disproportions to actual harm. Also, it entails punishment or acts as a deterrent against potential contract violations. The penalties are obtained when it’s determined that agreement stipulations have not been met. For instance, builders who fail to meet a schedule may have to pay penalties. The principle of mandating payment to repent a damage instead of a penalty harkens back to equity courts, where the aim was to safeguard parties from making unconscionable bargains or overstretching boundaries.

A party may also wish to invoke liquidated damages for a variety of reasons. First, liquidated damages place a price on costs that are hard to assess in the future, so they give parties a standard by which to measure benefits or losses if they try to decide on breaching an agreement.

To learn more on how you should define liquidated damages, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will help any party obtain the necessary damages in case an agreement breach occurs. Moreover, our lawyers will read over any agreements before you sign them.