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Liquidated damages

You need to understand what liquidated damages are. Here’s what to know.

What are liquidated damages?

Liquidated damages are specified in a purchase agreement that one party must pay the other in the event the contract is breached.

Deeper definition

For the most part, a clause for liquidated damages is included as part of any contract that involves the exchange of money for some future service to be performed. Sometimes, these clauses can be challenged in court.

Liquidated damages are a form of actual damages often claimed when actual damages are difficult to prove in court. Sometimes, the defendant does not have to pay out the liquidated damages, even if damages likely occurred. This is particularly applicable if the defendant can prove that the clause was imposed as some type of punishment for breaking contract terms.

Seeking liquidated damages is intended to be a way for the plaintiff to achieve fair representation of losses in a case with unclear actual damages. Liquidated damages are not intended to be punitive in nature.

Liquidated damages often have the following qualities:

  • An injury of any type that is unclear or hard to quantify.
  • The requested damages total a reasonable amount and are considered the actual or anticipated amount caused by the breach of contract.
  • The loss is difficult or impossible to prove.
  • No better alternative remedy exists.
  • Damages are to function as a measure of fairness, not as punishment.

Generally, cases involving breach of contract and liquidated damages can be agreed upon through arbitration. They are usually settled mutually by both parties. Since the sum is typically agreed upon before the contract is signed, there shouldn’t be any real surprises for either side if a breach of contract occurs.

Liquidated damages example

If you sign a contract with someone to perform contracting services for your company, you may consider adding a liquidated damages clause to the contract. This clause would activate if a breach of contract occurs, such as when your contractor doesn’t do the work he promised. Though it could be difficult to prove actual damages as a result of the breach, you still could get your liquidated damages to compensate for your loss.

Can you claim damages to your personal property on your taxes? Learn more about whether your claim of damages counts as an IRS casualty loss.

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