What are liquidated damages?

Where a party to a contract breaches that contract, the non-breaching party is usually entitled to, among various possible remedies, an award of damages. An award of damages is granted to compensate the non-breaching party for the loss and/or damage suffered as a result of the breach.

Parties can agree to stipulate the amount that a party must pay if it breaches the contract. That stipulation (specific or otherwise) is commonly referred to as a ‘liquidated damages clause’.

These clauses are commonplace in construction contracts. Typically, they provide that the principal is entitled to be paid an agreed sum by the contractor for each day or week past the date for completion that the works are delayed.

However, a liquidated damages clause will not be enforceable where it is held to constitute a ‘penalty’.

Liquidated damages clauses are also referred to as ‘agreed remedies clauses’, ‘agreed damages clauses’, ‘pre-estimated damages clauses’, ‘stipulated damages clauses’, ‘adjustment of time costs’ or ‘liquidated and ascertained damages clauses’.