A liquidated damages clause sets a fixed amount one side pays if it breaks the contract, agreed in advance instead of proving actual losses later. Courts enforce a reasonable estimate but strike down amounts that are really a penalty rather than a genuine forecast of harm.
A liquidated damages clause is the parties’ attempt to decide, up front, what a breach will cost — useful when actual damages would be hard to calculate. Instead of litigating losses after the fact, the breaching side pays the pre-agreed figure. The catch is the line between a legitimate estimate and a penalty: courts generally enforce liquidated damages when the amount was a reasonable forecast of likely harm at signing, but refuse to enforce a figure so high it functions as a punishment or a threat to force performance. If you see one, the question is whether the number is a fair estimate or a hammer.
No. Courts enforce a reasonable pre-estimate of harm but strike down amounts that are really a penalty designed to punish or force performance.
A liquidated damages amount is a genuine forecast of likely loss; a penalty is set to punish. Courts enforce the former and refuse the latter.
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