Stipulating damages in a liquidated damages clause

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Hi and welcome to TransLegal's lesson of the week.

Today we're going to be talking about liquidated damages.

Liquidated damages are a fixed or determined sum agreed by the parties to a contract in advance to be payable upon the breach of the contract by one of the parties to compensate the injured party or the non-breaching party.

The purpose of liquidated damages is for the non-breaching party to avoid the costs which arise as a result of the difficult task of proving the amount of loss actually incurred due to a breach.

Now, it's important to note that if a liquidated damages clause constitutes a penalty, it will be deemed void. So it's important to draft the clause in the contract such that it compensates the party for the anticipated loss caused by the breach but doesn't go beyond that and actually serve as a penalty.

For example, the amount of damages stipulated in the contract should be reasonable and not extend far beyond that which would normally compensate the anticipated loss.

It should also be noted that in all other cases where the Court quantifies or has to assess damages or loss, the damages are known as unliquidated damages.

That's it for today. If you have any questions about the subject of liquidated damages, please leave your question or comments in the comment box below and myself or one of my colleagues will get back to you as soon as we can.

Thank you.