What are Liquidated Damages?

This post explains the meaning of the legal term “liquidated damages“. It is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology .

Sometimes a contract specifies an amount that a party must pay for breaching that contract. The legal terms for that amount is liquidated damages.

Liquidated Damages Example

As an example, let’s assume that Caroline and I enter into a contract that states the following:

• Caroline will serve as a bartender at my party next weekend.
• At the end of that party, I will pay Caroline $200 for her services.
• If Caroline does not show up at the party, she will pay me $100 for the inconvenience I incurred by having to tend bar myself.

That last provision, specifying the amount Caroline must pay if she breaches the agreement, is a liquidated damages provision.

Not Always Enforceable

Courts will not necessarily enforce all liquidated damages provisions. For example, if the provision discussed above stated that Caroline would pay me $1 million, that damages amount is absurdly high, thus a court would not enforce it.

In California, the applicable statute is Civil Code Section 1671. Although that statute specifies various exceptions, the relevant portion states:

[A] provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

In simpler terms, a California court will enforce a liquidated damages provision only if:

• It would be difficult to determine actual damages resulting from a breach; and
• The specified amount is an estimate of what actual damages would be, rather than an arbitrary amount.

Photo by Vladimir Solomyani on Unsplash

Check out all posts about contracts.

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.