Liquidated Damages – an amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches

liquidated damages:
(18c)

1. An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches.  *  If the parties to a contract have properly agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages.  — aka stipulated damages; estimated damages.  See LIQUIDATED-DAMAGES CLAUSE.  Cf. unliquidated damages; PENALTY CLAUSE. [1]

1. A sum stipulated and agreed upon by the parties, at the time of entering into a contract, as being payable as compensation for loss suffered in the event of a breach.  22 Am J2d Damg § 213.
     As to the distinction between penalties and liquidated damages, see 22 Am J2d Damg § 213. [2]

1. A sum agreed upon by the parties at the entering into a contract as being payable by way fo compensation for loss suffered in the event of a breach of contract; a sum similarly determined by a court in a lawsuit resulting from breach of contract. 
     Compare unliquidated damages.  For the distinction between a penalty and liquidated damages, see penal bond; penalty. [3]

     Excerpt from William R. Anson’s Principles of the Law, of Contract (Arthur L. Corbin ed., 3d Am. ed. 1919):

     “Where the terms of a contract specify a sum payable for non-performance, it is a question of construction whether this sum is to be treated as a penalty or as liquidated damages. The difference in effect is this: The amount recoverable in case of a penalty is not the sum named, but the damage actually incurred. The amount recoverable as liquidated damages is the sum named as such. In construing these terms a judge will not accept the phraseology of the parties; they may call the sum specified ‘liquidated damages,’ but if the judge finds it to be a penalty, he will treat it as such.[4]

     Excerpt from P.S. Atiyah’s An introduction to the Law of Contract (3d ed. 1981):

     “The distinction between a penalty and genuine liquidated damages, as they are called, is not always easy to apply, but the Courts have made the task simpler by laying down certain guiding principles. In the first place, if the sum payable is so large as to be far in excess of the probable damage on breach, it is almost certainly a penalty. Secondly, if the same sum is expressed to be payable on any one of a number of different breaches of varying importance, it is again probably a penalty, because it is extremely unlikely that the same damage would be caused by these Varying breaches. Thirdly, where a sum is expressed to be payable on a certain date, and a further sum in the event of default being made, this latter sum is prima facie a penalty, because mere delay in payment is unlikely to cause damage. Finally, it is to be noted that the mere use of the words ‘liquidated damages” is not decisive, for it is the task of the Court and not of the parties to decide the true nature of the sum payable.[5]

References:

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[1]: Black’s Law Dictionary Deluxe Tenth Edition by Henry Campbell Black, Editor in Chief Bryan A. Garner. ISBN: 978-0-314-61300-4

[2]: Ballantine’s Law Dictionary with Pronunciations
Third Edition by James A. Ballantine (James Arthur 1871-1949).  Edited by William S. Anderson.  © 1969 by THE LAWYER’S CO-OPERATIVE PUBLISHING COMPANY.  Library of Congress Catalog Card No. 68-30931

[3]: Ballantine’s Law Dictionary Legal Assistant Edition by Jack Ballantine (James Arthur 1871-1949).  Doctored by Jack G. Handler, J.D. © 1994 Delmar by Thomson Learning.  ISBN 0-8273-4874-6.

[4]: William R. Anson, Principles of the Law, of Contract 470 (Arthur L. Corbin ed., 3d Am. ed. 1919)

[5]: P.S. Atiyah, An introduction to the Law of Contract 316-17 (3d ed. 1981)

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