Also known as: liquidated damage · liquidate damages · stipulated damages · agreed damages
Written by attorneys · grounded in primary & secondary sources — see below
A contractual stipulation that fixes in advance the damages payable upon breach. The amount must be reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing an unreasonably large amount is unenforceable as a penalty.
Horizon Land hired Vertex Land to build a condo tower. The contract set a $50,000 daily penalty for late completion. Horizon anticipated only $8,000 per day in lost rent. When Vertex finished thirty days late, Horizon sought the full stipulated sum. The court refused enforcement because the amount bore no reasonable relation to the anticipated loss.
Ridge Buildings ordered custom glass panels from WindowCo and paid a forty percent deposit. The contract allowed WindowCo to keep the entire deposit if Ridge cancelled within sixty days. Ridge cancelled after discovering pre-contract interference by another party. WindowCo retained the deposit. The court upheld the clause because the custom nature of the goods made actual loss difficult to prove and the amount was a reasonable forecast of harm.
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Karen, Daisy, and Byron formed a partnership to run a clothing store. The agreement allowed Karen to impose reasonable limits on information sharing and set liquidated damages for any breach of those limits. Daisy and Byron later demanded full financial records. Karen supplied only summaries and invoked the damages clause when they protested. The court examined whether the stipulated amount was reasonable in light of the anticipated harm from unauthorized disclosure.
A, B, and C formed a veterinary partnership. Each promised not to compete after leaving and to pay $50,000 as liquidated damages for breach. A left and immediately began practicing in the same town. B and C sought an injunction. The court granted the injunction even though the agreement contained a liquidated damages provision.
Walker-Thomas Furniture sold items to Williams on installment. The contract contained a cross-collateral clause that allowed repossession of all prior purchases if any payment was missed. Williams defaulted on a single item. The seller sought to repossess everything. The court refused to enforce the clause because it operated as an unreasonable penalty disproportionate to the actual loss.
Nixon and Fitzgerald reached a settlement after litigation. Nixon paid $142,000 immediately. The parties agreed Fitzgerald would receive an additional $28,000 in liquidated damages if the Supreme Court denied immunity. The Court later ruled on the immunity issue. The agreed sum was treated as an enforceable liquidated damages provision rather than a penalty.
The amount must be reasonable in light of the anticipated or actual loss caused by the breach. Proof of loss must also have been difficult at the time of contracting.
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A sum becomes an unenforceable penalty when it is unreasonably large in relation to the anticipated or actual loss. Courts refuse enforcement on public policy grounds in that situation.
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No. Specific performance or an injunction may still be granted even when the contract contains an enforceable liquidated damages provision for the same breach.
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The party seeking to enforce the clause bears the burden of showing that the amount is reasonable in light of anticipated loss.
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Difficulty of proving actual loss is one factor courts consider. When loss would be hard to quantify, a reasonable pre-estimate is more likely to be upheld.
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…its terms the petitioner Nixon paid the respondent Fitzgerald a sum of $142,000. In consideration, Fitzgerald agreed to accept liquidated damages of $28,000 in the event of a ruling by this Court that petitioner was not entitled to absolute immunity. In case of a decision upholding petitioner's immunity claim, no further payments…