Liquidated Damages Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Liquidated Damages, written in plain English, along with examples of how it is used.

What is Liquidated Damages?

(n) Liquidated damages are the quantified damages payable by a party to the opposite party of the contract for the damages caused by his failure or on his incapacity to do or fulfill the conditions set in the agreement. Liquidated damages are the conditions included in the agreement and hence it is payable unless there is a fraud or gross misunderstanding to make the agreement itself as void

History and Meaning of Liquidated Damages

Liquidated damages refer to the damages that are previously agreed on by both parties in a contract. This provision helps avoid any ambiguity about compensation in the event one party fails to fulfill their contractual obligations. The idea behind liquidated damages goes back to Roman law where it was known as "litis aestimatio." Liquidated damages provisions are commonly used in construction, real estate, and employment contracts as they are effective ways to manage and mitigate risk.

Examples of Liquidated Damages

  1. If a tenant breaks their lease agreement early, a liquidated damages clause can determine how much they owe the landlord in compensation.
  2. In construction contracts, a penalty can be imposed on builders if they fail to complete a project by a specific deadline.
  3. An employment contract could include a liquidated damages provision to require an employee to repay a portion of their signing bonus if they leave the company before a specified timeframe.
  4. A business can include a clause in a contract establishing a pre-determined amount that it will be paid if the other party discloses confidential information.
  5. A car rental agreement may contain a clause that imposes a fee on renters who return the car later than they agreed.

Legal Terms Similar to Liquidated Damages

  1. Damages: The compensation paid to someone who's suffered injury, harm, or loss due to another person's action.
  2. Penalty: A payment required in compensation for a breach of contract, but unlike liquidated damages, the penalty fee is imposed as a punishment for the breach.
  3. Specific Performance: A contractual remedy that requires one party to fulfill their obligation under the contract as agreed. It is used when a monetary settlement is inadequate, and a breach harms the non-breaching party.