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By Pixie Alexander, eHow Contributor updated: April 20, 2010
Liquidated damages compensate a party to a contract when specific things don't go as expected.
In contract law, the parties to a contract may agree upon an amount of "liquidated damages" one party must pay the other if it fails to uphold a certain obligation under the contract. Liquidated damages are intended to protect parties against the damage that could occur if certain obligations aren't met on time.
1. According to Cornell University's Legal Information Institute, liquidated damages are
damages, usually paid in cash, for the breach of a specific contract provision. For instance, if a supplier agrees to deliver machine parts to a buyer by April 15, but does not deliver them until April 16, the supplier may be liable for liquidated damages if the April 15 deadline was a vital part of the contract.
2. As Cornell University's Legal Information Institute also notes, liquidated damages clauses are frequently included in contracts. They offer a way for parties to "insure" themselves against a particular breach. For instance, a machine parts buyer may insist on a liquidated damages clause that states the supplier will pay a certain amount of money if the supplier fails to deliver the machine parts by a certain date. The money is intended to compensate the buyer for lost sales and other losses that will occur if the buyer doesn't have the parts in time.
3. Liquidated damages are a special type of actual damages, according to Free Legal
Encyclopedia. That is, they are damages paid for a breach that actually occurred. They are not intended to be punitive damages, or damages that punish the breaching party. Courts will generally uphold reasonable liquidated damages clauses, but will not
the court will likely require the supplier to pay the $100. if the machine parts supplier fails to give the buyer the parts in time.000 in sales.com/about_6363273_meaning-liquidateddamages_. a liquidated damages clause will be struck down in favor of a judgment that the breaching party should pay the actual. they provide a kind of "insurance" against possible breach. instead of merely making things the way they would have been without a breach. For instance. but five times that amount overcompensates the buyer and punishes the seller.000 range. they allow the parties to agree on damages without having to go to court. Third.usually uphold clauses that appear to impose punitive damages. the court will uphold the liquidated damages clause as long as the clause requires damages of in the $100.com http://www. and the buyer knows he lost exactly $100. Uncertain Damages 4. If the amount of damages is ascertainable. First.000 in sales by not having the parts.000 instead of the amount listed in the liquidated damages clause. liquidated damages clauses in contracts offer several advantages. Second. they provide a firm number so that both parties can figure the cost of a possible breach into their arrangement. According to Cornell University's Legal Information Institute. Advantages 5.html#ixzz1FDrSdmyy . a court might uphold a liquidated damages clause that says the machine parts supplier must pay for the amount of the sales the buyer would likely lose by not having the parts in time. ascertained damages amount. in addition to covering actual damages. which saves the parties time and court costs. This is because the amount of the lost sales is damage that actually occurred to the buyer. if the buyer cannot know exactly how much in sales he'll lose. however. However. For example. a liquidated damages clause must also cover damages that could not be ascertained at the time of breach. uphold a clause that says the supplier must pay five times the amount of the lost sales. Read more: What Is the Meaning of Liquidated Damages? | eHow. According to the Free Legal Encyclopedia. The court might not. but knows he usually makes about $100.ehow.
based on the percentage of work uncompleted. or liquidated damages may be a percentage of the value of the contract. In some cases liquidated damages may be the forfeiture of a deposit or a down payment. . Liquidated damages are often paid in lieu of a lawsuit. are sometimes paid when there is uncertainty as to the actual monetary loss involved. as opposed to a penalty. although court action may be required in many cases where liquidated damages are sought. Liquidated damages.Liquidated damages are a payment agreed to by the parties of a contract to satisfy portions of the agreement which were not performed. The payment of liquidated damages relieves the party in breech of a contract of the obligation to perform the balance of the contract.
or by a previous agreement between the parties who foresaw the consequences of a breach of the engagement and stipulated accordingly. When. In such cases an estimate of the damages may be made by a jury. The civil law generally agrees with these principles. An agreement for liquidated damages can only be when there is an engagement for the performance of certain acts that if not done would injure one of the parties or to guard against the performance of acts that would be injurious if done. The damages will be considered as liquidated in the following cases: When the damages are uncertain and not capable of being ascertained by any satisfactory or known rule whether the uncertainty lies in the nature of the subject itself or in the particular circumstances of the case. The fixed amount which a party to an agreement promises to pay to the other. in case he shall not fulfill some primary or principal engagement into which he has entered by the same agreement.LIQUIDATED DAMAGES When the parties to a contract agree to the payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things particularly mentioned in the agreement. from the nature of the case and the tenor of the agreement. the sum is called liquidated damages. it is clear that the damages have been the subject of actual and fair calculation and adjustment between the parties. . The amount of money specified in a contract to be awarded in the event that the agreement is violated. It differ from a penalty which is a forfeiture from which the defaulting party can be relieved.
' or 'liquidated damages. Where. it appears that the parties have ascertained the amount of damages by fair calculation and adjustment. Where the agreement was evidently made for the attainment of another object. Where the damages are uncertain.Generally the sum fixed upon will be considered either liquidated damages or a penalty according to the intent of the parties. Where the parties in the agreement have expressly declared the sum intended as a forfeiture or a penalty. to which the sum specified is wholly collateral. Where the damages are capable of being certainly known and estimated. 2. and yet the sum named is payable for the breach of any.' will not be decisive of the question if the instrument. 5. Where the agreement contains several matters of different degrees of importance. and a certain debt or damages less than the penalty is made payable on the face of the instrument. It Has Been Treated As Penalty: 1. 3. from the tenor of the agreement or the nature of the case. and no other intent can be collected from the instrument. Rules have been adopted to ascertain whether the sum agreed upon is to be considered a penalty or liquidated damages. Where it is doubtful whether it was intended as a penalty or not. and are not capable of being ascertained by any satisfactory and known rule.' 'forfeiture. discloses a different intent. 2. --b-- . 4. The use of the words 'penalty. It Has Been Considered As Liquidated Damages: 1. taken as a whole. even the least.
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