What are Liquidated Damages?

Definition of Liquidated Damages

Liquidated damages are a pre-agreed amount of money that one party to a contract agrees to pay the other party if they breach the contract. They are designed to compensate the non-breaching party for their losses, and to deter the breaching party from breaking the contract.

Liquidated damages are typically used in contracts where it is difficult to estimate the actual damages that would be caused by a breach. For example, a contract for the construction of a building might include a liquidated damages clause for the contractor’s failure to complete the project on time. In this case, it would be difficult to accurately estimate the cost of the delay, so the parties might agree on a fixed amount of liquidated damages.

A typical size of the liquidated damages can be up to 10% of the contract value.

The key advantages of liquidated damages are:

• They can help to deter breaches of contract.
• They provide certainty for both parties to the contract.
• They can simplify the process of calculating damages in the event of a breach.

Here are some of the disadvantages of liquidated damages:

• They can be difficult to enforce.
• They can be seen as a penalty, which may be unenforceable.
• They can discourage parties from negotiating a settlement in the event of a breach.

Overall, liquidated damages can be a useful tool for businesses, but they should be used with caution. It is important to ensure that the amount of liquidated damages is reasonable and that the clause is enforceable.

Using Purchase Orders to Enforce Liquidated Damages

To ensure timely delivery, liquidated can be enforced in the general terms and conditions when placing purchase orders with your suppliers. For more information about the benefits of using purchase orders in your business we recommend the article below:

5 reasons to use purchase orders in your business