Definition of liquidating damages
The amount of money specified in a contract to be awarded in the event that the agreement is violated.
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.
To be legally enforceable, the contract’s nature makes damages circumstantially reasonable and difficult to determine.
But depending on how a liquidated damages clause is written, it can potentially be challenged in court.
In Case of Contract Breach A liquidated damages clause sets an amount in a contract in the event of a breach.
Otherwise, a court could interpret the specified amount as a fine, being in the contract primarily to force proper performance, and not to compensate injury.
Under these conditions, the court views damages as ‘unliquidated’ to be assigned by the court based on the case’s merits alone.