What is a Liquidated Damage Clause in a Contract?

A liquidated damage clause provides monetary amounts for non-deliver or performance in a contract. This clause is outside any other right that a party has a right to pursue damages from a contractual relationship. A good example where the liquidated damage clause is good is if you want a customized piece of software and the software company agrees to modify the software to your requirement. In a liquidated damage clause you would specify a delivery date of the software and a monetary amount such as $50 dollars for every day of delay and $15,000 if the company never delivers the software.

The court system will enforce a liquidated damage clause if it meets two conditions: a) when both parties sign a contract the potential damages are uncertain and difficult to prove and b) the damages have to be a compensation for injuries and not referred to as a penalty. The court systems will not enforce a penalty clause in a contract.

Watch out for the liquidated damages clause being referred to as exclusive because that's all the monetary amount of damages you'll be able to recoup. You should write the liquidated damages clause as "these liquidated damages do not preclude the injured party from seeking additional damages as provided within the contract."

The liquidated damages clause is a tough negotiation point in contract negotiations. Many states will not enforce the clause because injuries are hard to prove and the dollar amounts are hard to justify for things such as lost business opportunities.

During contract negotiations both parties will need to analyze the consequences for not delivering a product or service on time. The dollar amounts for non-delivery must be justifiable as much as possible. Also, make sure you have language regarding the justification for liquidated damages. Always state that the parties agree that the damages set forth in the clause are liquidated damages and not penalties.

Even if the parties agree to the liquidated damages clause and the other party sues the other in a court of law the courts for the most part will not enforce the dollar amounts because they're hard to prove. You'll probably spend more on legal fees than trying to recoup any money that was stated within the liquidated damage clause.

if you don't have use the liquidated damage clause in a contract make sure you have additional termination by default conditions spelled out so if the company doesn't deliver as stated you can terminate the contract and recoup the money spent with the vendor up until the termination date stated in a letter to the company.