Clause primer
Liquidated damages clause
The parties agree in advance on a fixed amount, or a formula, that one party pays the other if a specified breach occurs, in place of proving actual damages.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: agreed damages, stipulated damages, delay damages. Where you find it: Construction and equipment supply contracts, outsourcing and services agreements with delivery milestones, real estate purchase agreements (deposit retention), and some commercial leases and sponsorship deals.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
If Supplier fails to achieve Final Acceptance by the Target Date, Supplier shall pay Customer, as liquidated damages and not as a penalty, one half of one percent (0.5%) of the Contract Price for each full week of delay, up to a maximum of ten percent (10%) of the Contract Price. The parties agree that Customer's damages from delay would be difficult to determine and that this amount is a reasonable estimate of those damages made at signing. Payment of liquidated damages under this Section is Customer's sole monetary remedy for delay, but does not limit Customer's right to terminate under Section 14.
How it works
Trigger
The clause names one specific breach (missing Final Acceptance by the Target Date) and nothing else. A narrow trigger keeps the agreed sum tied to the harm the parties actually estimated, which matters if enforceability is challenged.
Amount and cap
A weekly percentage of the contract price, capped at ten percent, gives a predictable maximum exposure. The cap is often the most negotiated number in the clause and frequently sits inside, or alongside, the general limitation of liability.
Reasonableness recital
The statement that damages are hard to measure and that the sum is a reasonable estimate records the factors most U.S. courts examine. A recital helps but does not decide the question; a court looks at the substance, and labeling the payment "not a penalty" does not by itself make it enforceable.
Exclusivity and carve-out
Making the payment the sole monetary remedy for delay gives the paying party certainty, while preserving termination keeps the other side from being stuck with an endlessly late project. Whether liquidated damages are exclusive is a separate drafting choice that should always be stated expressly.
Why it is there
The clause trades the cost and uncertainty of proving actual loss for a known number agreed at signing. It protects the party that would suffer hard-to-quantify harm from a breach, typically a customer facing delay, by giving it a recovery it can collect without litigation over causation and amount. It also protects the breaching party by capping its exposure for that breach.
How it works with other clauses
- Limitation of liability: check whether liquidated damages count toward the overall cap or sit outside it, since the two clauses are often drafted by different people and can conflict.
- Consequential damages waiver: a broad waiver of lost profits can be argued to cut into liquidated damages unless the clause states they are recoverable notwithstanding the waiver.
- Termination: if exclusivity is not limited, the payee may lose the right to terminate or claim general damages for the same delay.
- Force majeure and excusable delay: the trigger usually needs to exclude delay caused by the payee or by excused events, or the paying party may owe for delay it did not cause.
Negotiating it
Who it protects: The party whose loss from the breach is hard to prove, usually the customer or buyer.
If it protects you
- Keep the reasonableness recital and a record of how the rate was estimated, such as internal cost analysis at signing.
- State that liquidated damages are recoverable regardless of any consequential damages waiver.
- Preserve termination rights and any remedy for breaches other than the one liquidated.
If it runs against you
- Standard ask: a total cap expressed as a percentage of fees and a statement that liquidated damages are the sole remedy for the covered breach; fallback: a cap plus a grace period before accrual begins.
- Ask that the trigger exclude delay caused by the other party, its contractors or force majeure events.
- Ask that liquidated damages count toward the general liability cap.
Escalate before accepting: An uncapped daily or weekly charge that is not exclusive, leaving the payer exposed to both the agreed sum and full actual damages for the same breach, usually warrants escalation.
What AI explanations get wrong
- Treating the words "not a penalty" as making the clause enforceable; check whether the amount is a reasonable estimate in light of anticipated or actual harm under the governing law.
- Assuming liquidated damages are always the exclusive remedy; check the clause for express exclusivity language and read the remedies section.
- Missing the interaction with the limitation of liability and consequential damages waiver; search the agreement for every cap and exclusion and map how each applies.
- Applying UCC Section 2-718 to a services contract; check whether the agreement is predominantly for goods before relying on Article 2.
Where the law varies
U.S. courts generally refuse to enforce an agreed sum that operates as a penalty, but the tests differ by state, including whether reasonableness is judged at signing, at breach, or both. For sales of goods, UCC Section 2-718 supplies the rule as adopted in each state.
Sources
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the Commercial Contracts Starter Pack.