what is the meaning of liquidated damages

7/31/2019 What is the Meaning of Liquidated Damages

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What Is the Meaning of Liquidated Damages?

By A.L. Kennedy, eHow Contributor

Liquidated damagescompensate 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 partymust pay the other if it fails to uphold a certain obligation under the contract. Liquidated damages areintended to protect parties against the damage that could occur if certain obligations aren't met ontime.

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Definitiono According to Cornell University's Legal Information Institute, liquidated damages are

damages, usually paid in cash, for the breach of a specific contract provision. Forinstance, if a supplier agrees to deliver machine parts to a buyer by April 15, but doesnot deliver them until April 16, the supplier may be liable for liquidated damages if theApril 15 deadline was a vital part of the contract.

Contract Clauses

o 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 insiston a liquidated damages clause that states the supplier will pay a certain amount ofmoney if the supplier fails to deliver the machine parts by a certain date. The money isintended to compensate the buyer for lost sales and other losses that will occur if the

buyer doesn't have the parts in time.
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Actual Damages

Liquidated damages are a special type of actual damages, according to Free LegalEncyclopedia. That is, they are damages paid for a breach that actually occurred. They are notintended to be punitive damages, or damages that punish the breaching party.

Courts will generally uphold reasonable liquidated damages clauses, but will not usuallyuphold clauses that appear to impose punitive damages. For instance, a court might uphold aliquidated damages clause that says the machine parts supplier must pay for the amount of thesales 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 theamount of the lost sales. This is because the amount of the lost sales is damage that actuallyoccurred to the buyer, but five times that amount overcompensates the buyer and punishes theseller, instead of merely making things the way they would have been without a breach.

Uncertain Damages

According to Cornell University's Legal Information Institute, in addition to covering actualdamages, a liquidated damages clause must also cover damages that could not be ascertainedat the time of breach. If the amount of damages is ascertainable, a liquidated damages clausewill 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 thebuyer 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 damagesclause. However, if the buyer cannot know exactly how much in sales he'll lose, but knows heusually makes about $100,000 in sales, the court will uphold the liquidated damages clause aslong as the clause requires damages of in the $100,000 range.

Advantages

According to the Free Legal Encyclopedia, liquidated damages clauses in contracts offerseveral advantages. First, they provide a firm number so that both parties can figure the cost ofa 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 tocourt, which saves the parties time and court costs.


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How to Calculate Liquidated DamagesBy MorganO, eHow Contributor

Liquidated damages are stipulated in a contract.

If you have suffered monetary damages as the result of another party's breach of contract, you may beentitled to liquidated damages if a clause providing for them was included in the contract. Liquidateddamages are monetary compensation for a breach of contract. According to Melone and Karnes,"these damages are only appropriate when the actual damages resulting from the breach of contractare difficult to ascertain or uncertain." The amount of these damages must be "reasonably

proportionate" to the actual amount of the loss for them to be enforceable in court.

Actual Damages

Liquidated damages are a special type of actual damages, according to Free LegalEncyclopedia. That is, they are damages paid for a breach that actually occurred. They are notintended to be punitive damages, or damages that punish the breaching party.

Courts will generally uphold reasonable liquidated damages clauses, but will not usuallyuphold clauses that appear to impose punitive damages. For instance, a court might uphold aliquidated damages clause that says the machine parts supplier must pay for the amount of thesales 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 theamount of the lost sales. This is because the amount of the lost sales is damage that actuallyoccurred to the buyer, but five times that amount overcompensates the buyer and punishes theseller, instead of merely making things the way they would have been without a breach.

Uncertain Damages

According to Cornell University's Legal Information Institute, in addition to covering actualdamages, a liquidated damages clause must also cover damages that could not be ascertainedat 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.


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For example, if the machine parts supplier fails to give the buyer the parts in time, and thebuyer knows he lost exactly $100,000 in sales by not having the parts, the court will likelyrequire the supplier to pay the $100,000 instead of the amount listed in the liquidated damagesclause. However, if the buyer cannot know exactly how much in sales he'll lose, but knows heusually makes about $100,000 in sales, the court will uphold the liquidated damages clause aslong as the clause requires damages of in the $100,000 range.

Advantages

According to the Free Legal Encyclopedia, liquidated damages clauses in contracts offerseveral advantages. First, they provide a firm number so that both parties can figure the cost ofa 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 tocourt, which saves the parties time and court costs.

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