Glossary · Legal and regulation
Liquidated damages
Liquidated damages are a sum fixed in a contract that one party pays the other for a specific breach, such as late delivery or late payment.
A liquidated damages clause sets the compensation in advance — so much per day of delay, say — so that neither side has to prove its actual loss after the fact.
Courts enforce these clauses only within limits. In US law, the amount must be a reasonable estimate of a loss that was hard to calculate in advance. In English law, since Cavendish v Makdessi (2015), the question is whether the clause protects a legitimate interest and isn’t out of all proportion to it. A clause that fails is a penalty and is unenforceable.
Late-payment fees in contracts are judged the same way. A charge that reasonably reflects the cost of being paid late is fine; one designed to punish the customer is at risk.
Example
A software contract requires the supplier to pay €500 for each day a go-live date is missed. Because delay costs are hard to quantify in advance and €500 is proportionate, the clause is likely to be enforced.