1. What Are Liquidated Damages?
2. What Is a Liquidated Damages Provision?
3. Why Would You Include a Liquidated Damages Provision in Your Contract?
4. When Are Liquidated Damages Appropriate?
5. When Will a Liquidated Damages Clause be Enforceable?

What is ld clause? LD stands for liquidated damages, which can be included in the clause of a contract to outline what one party would potentially pay the other if the contract is breached.

What Are Liquidated Damages?

Many contracts include liquidated damages clauses, but many people don't understand what liquidated damages are and how the clause could impact them. Most contracts involving a performance-based promise or the exchange of money will include stipulations around liquidated damages. However, this clause can be challenged in a court of law, depending on how it's written. This clause will outline the amount owed by one party to the other if the contract is breached. Liquidated damages provide insurance for the performance of the parties involved.

Although the clause may sound like a penalty, it actually exists to deter one party from breaching the contract or to punish the party if they do breach the agreement. The penalty is often disproportionate to the amount of actual harm caused by the breach.

However, the liquidated damages clause does offer protection to all parties involved in the contract. The parties might include:

  • Employers and employees
  • Buyers and sellers
  • Manufacturers and resellers

However, liquidated damages must be reasonable and estimate the potential actual damages that could impact one party as the result of a breach.

What Is a Liquidated Damages Provision?

The provision or clause for liquidated damages will specify the predetermined amount that one party would pay to the other if they failed to perform under the terms of a contract. The amount of money should be the best estimate by both parties of the damages that a breach of the contract would cause. The amount should also reflect the estimate based on the time the contract is signed. Although a liquidated damages clause can be useful, it isn't always legally enforceable.

If the court determines that the amount of damages outlined in the clause is grossly disproportionate to the harm suffered by the impacted party, the clause will not be enforced. The reasoning for this rejection of enforcement of the clause is the fact that it was a penalty instead of a reasonable estimate.

Why Would You Include a Liquidated Damages Provision in Your Contract?

Some of the main reasons parties choose to include this provision in their contracts include:

  • One party requires the inclusion of the clause as part of the negotiation process
  • The clause is linked to something that benefits the other party, such as a bonus for early completion
  • One party prefers to outline a certain stipulated amount, rather than try to prove actual damages in the event of a breach

When Are Liquidated Damages Appropriate?

Contracts can only include liquidated damages provisions when any of the following apply:

  • The loss of one or both parties is too hard to prove
  • The injury is difficult to quantify or uncertain
  • The damages serve as damages and not as a penalty to either party
  • The amount outlined considers the anticipated or actual harm caused by a breach of contract and is reasonable
  • No other alternative remedy exists

When drafting and reviewing contracts, parties often like to include a liquidated damages clause because it offers a more predictable way to anticipate costs and damages. The parties involved can compare the cost of a potential breach with the performance terms. This process is similar to how limited insurance works. Both parties can settle on an amount of money that has been mutually agreed upon, rather than having to go through an expensive litigation process and allow the courts to decide on an amount.

One type of contract that commonly includes a clause for liquidated damages is a real estate agreement. For a real estate buyer, the clause could limit the loss in the event that they default on the agreement. For a seller, this clause provides a set amount of money that serves as protection, which is usually the amount of the deposit paid on the property.

When Will a Liquidated Damages Clause be Enforceable?

In order to be legally enforceable, a provision must show that the damages would be difficult to estimate, making it more likely that a court would enforce the provision.

If you need help understanding what is ID clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.