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What is a Liquidated Damages Clause?

A "liquidated damages" clause is a provision contained in a contract where the parties to the contract establish a set amount as damages in the event of a breach of the contract. Liquidated damage clauses are included in contracts to (a) dissuade a party from breaching the contract and (b) reduce litigation costs by having a set agreement as to the amount of damages or the method for calculating damages in the event of a breach and dispute. Liquidated damage clauses are expressed in terms of actual dollars (i.e. a fixed sum that the parties agree to pay if they are found to have breached the agreement) or in terms of a method of calculating the damages based on a fixed formula.

Liquidated damage provisions are utilized in many business agreements, including franchise agreements, real estate contracts, trademark license agreements and vendor agreements. If you are involved in a business contract dispute, the existence or non-existence of a liquidated damages clause is a material factor that must be considered and discussed with your business lawyer.

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