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Liquidated Damages

LIQUIDATED DAMAGES constitute compensation agreed upon by the parties entering into a contract, to be paid by a party who breaches the contract to a nonbreaching party. Liquidated damages may be used when it would be difficult to prove the actual harm or loss caused by a breach. The amount of liquidated damages must represent a reasonable estimate of the actual damages that a breach would cause. A contract term fixing unreasonably large or disproportionate liquidated damages may be void because it constitutes a penalty, or punishment for default. Furthermore, if it appears that the parties have made no attempt to calculate the amount of actual damages that might be sustained in the event of a breach, a liquidated damages provision will be deemed unenforceable. In determining whether a particular contract provision constitutes liquidated damages or an unenforceable penalty, a court will look to the intention of the parties, even if the terms liquidated damages and penalty are specifically used and defined in the contract.

Additional topics

Law Library - American Law and Legal InformationFree Legal Encyclopedia: Cross‐contamination to Deed of covenantDamages - Compensatory Damages, Nominal Damages, Punitive Damages, Liquidated Damages, Appellate Review Of Damages, Further Readings - Treble Damages