What does the term liquidated damages mean?

What does the term liquidated damages mean?

Liquidated damages are presented in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties. It is a provision that allows for the payment of a specified sum should one of the parties be in breach of contract.

What does liquidated mean in liquidated damages?

Related Content. A fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties. If a liquidated damages payment constitutes a penalty it will be unenforceable. The term also describes sums expressly payable as liquidated damages under statute.

What is the difference between damages and liquidated damages?

Liquidated damages, like a penalty clause, is a pre-determined sum to be paid by the breaching party to the innocent party upon a particular breach of the contract. Liquidated damages are however different. These are not punishments and are rather awards of pre-agreed damages.

Where the liquidated damages are considered?

Thus, in contract when these damages are awarded it is known as liquidated damages. ‘Liquidated Damages’ means that it shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage.

How does liquidated damages work?

Liquidated damages are an amount of money, agreed upon by the parties at the time of the contract signing, that establishes the damages that can be recovered in the event a party breaches the contract. The amount is supposed to reflect the best estimate of actual damages when the parties sign the contract.

What are liquidated damages meant to cover?

A liquidated damages clause specifies a predetermined amount of money that must be paid as damages for failure to perform under a contract. The amount of the liquidated damages is supposed to be the parties’ best estimate at the time they sign the contract of the damages that would be caused by a breach.

Are liquidated damages a debt?

This two limb test read in conjunction with the Late Payment Act makes it clear that as liquidated damages are generally for a party failing to perform their duties under contract, they will rarely be considered a debt.

Are liquidated damages the same as a penalty?

In the United States, a liquidated damage clause is intended to estimate damages in the event of non-performance or breach of contract. If the liquidated damages are disproportionate, they can, however, be declared a penalty.

Why are liquidated damages important?

Liquidating damages in a contract limits the time, cost and difficulty of proving or challenging actual damages and, equally importantly, provides the parties with valuable information to use in assessing their risks and in determining what actions to take during construction.

Is liquidated damages a penalty?

In common law jurisdictions, liquidated damages clauses are enforced as of right, while penalty clauses are struck down and the innocent party is required to prove its actual loss.

What is difference between liquidated damages and penalty?

Liquidated damages: If the amount fixed by all parties is a genuine estimate of the loss by a future breach of contract, then it is liquidated damages. Penalty: If the amount fixed by all parties is unreasonable or used to force the performing party to fulfill the obligation, then it is a penalty.

Why is liquidated damages important?

One of the vital functions of liquidated damages provisions is to give contracting parties certainty as to their risk exposure. The common law will respect the parties’ agreed-risk allocation, and generally seek to uphold rather than strike down liquidated damages clauses.