Also known as: liquidated damages clause · liquidated damages provisions · liquidated damages · LD clause
Written by attorneys · grounded in primary & secondary sources — see below
A contractual stipulation that prescribes a fixed sum payable as damages upon breach of the agreement. 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 on grounds of public policy as a penalty.
Ridge Buildings signed a five-year lease with Gold Buildings that required payment of two years' rent upon early termination. After discovering pre-contract interference with the HVAC system, Ridge terminated early. Gold invoked the clause for the full amount. The court examined whether the fixed sum bore a reasonable relation to anticipated lost rent and proof difficulties at the time of contracting.
Ridge Buildings paid a 40 percent deposit to WindowCo for custom floor-to-ceiling panels and later cancelled within sixty days. WindowCo retained the entire deposit under the contract clause. The court assessed whether the retained amount was reasonable given the anticipated harm from lost profit on bespoke goods and the difficulty of resale.
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Karen, Daisy, and Byron formed a partnership with a clause imposing liquidated damages for unauthorized disclosure of supplier pricing data. Daisy and Byron later sought full financial records. Karen refused and invoked the damages provision when they threatened to share information. The court evaluated whether the fixed sum reasonably compensated for anticipated harm from misuse while permitting reasonable restrictions on access.
A, B, and C formed a veterinary partnership with a noncompete clause and a $50,000 liquidated damages provision for breach. A left and immediately began practicing nearby. B and C sought an injunction despite the damages clause. The court granted equitable relief because the provision did not preclude specific performance when the duty remained enforceable.
Neri contracted to buy a boat from Retail Marine but defaulted. The dealer later sold the same boat at the contract price yet claimed lost profit and incidental costs. The court allowed recovery of the dealer's expected profit on the lost sale plus storage expenses because the contract lacked an enforceable liquidated damages clause that would have capped the remedy.
Elm Aircraft contracted with Apex Aviation for satellite components under terms that included liquidated damages for late delivery. Apex missed deadlines and Elm incurred penalties from its airline customers. Elm sought to enforce the clause. The court reviewed whether the fixed amount reasonably estimated the anticipated harm from production delays and proof difficulties.
A clause is unenforceable when the fixed amount is unreasonable in light of anticipated or actual loss and the difficulties of proof of loss. Courts apply this test from the time of contracting and refuse enforcement on public policy grounds when the sum functions primarily as a deterrent rather than compensation.
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No. Specific performance or an injunction remains available to enforce a duty even when the contract contains a valid liquidated damages provision for breach of that duty. The clause does not fix a price for the privilege of nonperformance.
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The UCC adds an explicit factor of inconvenience or nonfeasibility of obtaining an adequate remedy. Both tests require reasonableness in light of anticipated or actual harm and proof difficulties, and both void unreasonably large amounts as penalties.
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Yes. The agreement may impose reasonable restrictions on information use and may define liquidated damages as a remedy for breach of those restrictions, provided the restrictions themselves do not unreasonably limit statutory partner rights.
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…v. Harlan & Hollingsworth Co. , 30 App.D.C. 270 (1908), may appear to reject the rule, in reaching its decision upholding the liquidated damages clause in that case the court considered the circumstances existing at the time the contract was made, see 30 App.D.C. at 279, and applied the usual rule on liquidated damages. See 5 Corbin,…