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.
Check out all posts about contracts.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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