Generally, contracts that involve the exchange of money or the promise of performance have a liquidated damages stipulation. The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised.
Conditions when Liquidated damages are imposed:
1) First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term.
2) Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.
Difference between liquidated damages and un-liquidated damages (penalty)
A penalty will be imposed if the loss or damage is reasonably certain if it’s uncertain then liquidated damages clause will be imposed.
Examples of liquidated damage
Undisclosed source code has value as a trade secret. Openly publishing the source code destroys the trade secret value. The trade secret value of source code is difficult or impossible to prove. There is no open market for "secret source code".
In the case of construction contracts, courts have occasionally refused to enforce liquidated damages provisions when both parties have contributed to the overall delay of the project.
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What is Liquidated damages? What are its clauses