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Simple English definitions for legal terms
liquidated-damages clause
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A quick definition of liquidated-damages clause:
A liquidated-damages clause is a part of a contract that decides how much money one party will have to pay if they break the agreement. Usually, courts will agree with this clause unless the amount of money is too much compared to the damage caused by the breach, or if the same amount of money is required for different types of breaches. If the clause is just for a delay in payment, it might not be allowed.
A more thorough explanation:
A liquidated-damages clause is a provision in a contract that specifies the amount of damages that one party will pay to the other if they breach the agreement. This clause is included in the contract to avoid the need for the parties to go to court to determine the amount of damages.
For example, a construction contract may include a liquidated-damages clause that specifies the amount of damages the contractor will pay the owner if the project is not completed by the agreed-upon deadline. The clause may state that the contractor will pay $1,000 per day for each day the project is delayed beyond the deadline.
Courts generally uphold liquidated-damages clauses unless the agreed-upon amount is deemed to be a penalty. This can happen if the amount is much higher than the probable damages that would result from a breach, if the same amount is payable for different types of breaches (some major, some minor), or if a delay in payment is listed as an event of default.
Overall, a liquidated-damages clause is a useful tool for parties to include in a contract to avoid disputes over damages in the event of a breach.