What is Liquidated damages? What are its clauses

Saad Iqbal | 🗓️Modified: July 4, 2014 | ⏳Read Time: 3 min | 👁Post Views: 121
Monetary compensation for a loss, detriment, or injury to a person or a person\’s rights or property, awarded by a court judgment or by a contract stipulation regarding violation of contract.


Cash compensation, agreed to by signed, written contract for breach of contract, payable to the aggrieved party. {Law Dictionary: (Black\’s Law Dictionary}
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:

Damages can be liquidated in a contract only if
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)

At common law, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause).
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

For example, suppose Saad Iqbal agrees to lease a store-front to Zubair Saleem, from which Zubair intends to sell jewelry. If Saad breaches the contract by refusing to lease the store-front at the appointed time, it will be difficult to determine what profits Zubair will have lost because the success of newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for Zubair to insist upon a liquidated damages clause in case Saad fails to perform.
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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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