What It Does
A liquidated damages clause replaces a future fight over what a breach cost with a number both sides agree to now. For in-house counsel, it trades certainty for the risk of getting the estimate wrong: set it well and you skip proving damages; set it too high and a court may strike it as a penalty, leaving you to prove actual damages anyway. Enforceability turns on two questions asked as of the signing date: was the loss hard to quantify, and is the sum a genuine estimate of it?
When You'll See It
Liquidated damages appear wherever a breach causes real but hard-to-measure loss: construction and supply delays, SaaS service-level credits, early-termination and prepayment fees, and registration-rights and financing milestones. In-house teams negotiate them as both a shield and a sword, depending on which side is likely to slip. They are most useful when proving actual damages would be slow, expensive, or speculative. See also: limitation of liability, termination, and service level agreement.
Examples
Gaia, Inc.
Investors, Registration Rights Agreement
Formula
One-Sided
2024
“the Company will make pro rata payments to each Investor, as liquidated damages and not as a penalty, in an amount equal to 1.5% of the aggregate Purchase Price Per Share paid by the Investors ... for each 30-day period or pro rata for any portion thereof following the Filing Deadline ... Such payments shall constitute the Investors’ exclusive monetary remedy for such events.”
Source
iBio, Inc.
Loeb Term Solutions LLC, Promissory Note
Early-prepayment fee
One-Sided
2024
“Borrower shall pay to Lender, as an early prepayment fee as liquidated damages and not as a penalty, an amount equal to four percent (4%) of the stated principal amount of the Note being prepaid ... provided that after the passage of twelve (12) months from the date of the Loan ... the Prepayment Fee shall be an amount equal to three percent (3%).”
Source
The Boeing Company
Federal Express Corporation, Liquidated Damages Letter Agreement
Delivery delay, per-day, capped, exclusive remedy
One-Sided
2023
“Boeing agrees to pay Customer liquidated damages for each day of Non-Excusable Delay in excess of [*] (collectively the ‘Non-Excusable Delay Payment Period’) at a rate of [*] per day per Aircraft not to exceed an aggregate sum of [*] per Aircraft (‘Liquidated Damages’).”
Source
Rio Grande LNG, LLC
Bechtel Energy Inc., EPC Agreement (Schedule E-3)
Construction completion delay, per-day
One-Sided
2023
“In accordance with Sections 13.1A and 13.1.B of the EPC Agreement, if Substantial Completion occurs after the Guaranteed Substantial Completion Date (as adjusted by Change Order), for the applicable Train, Contractor shall pay to Owner Substantial Completion Delay Liquidated Damages in the amounts set forth in this Attachment E for each Day, or portion thereof, of delay.”
Source
Negotiate
You want the liquidated damages
Tie the amount to a genuine, documented estimate of the loss made at signing, so it survives a penalty challenge.
Use a per-period or per-unit formula (per day of delay, per point of downtime) rather than a single round number.
State expressly that the sum is a reasonable estimate of a loss that is hard to quantify.
Decide whether the liquidated damages are the exclusive remedy or sit alongside other remedies, and say so.
Keep the liquidated damages outside the limitation of liability cap if you want them to mean something.
You want to limit it
Push the amount down to a defensible estimate, and cap the aggregate exposure.
Make the liquidated damages the exclusive remedy for that breach, so you avoid paying them plus actual damages.
Add cure periods, and carve out delays caused by the other party or by force majeure.
Tie the trigger to material breaches only, with clear measurement.
Reserve the argument that a disproportionate figure is an unenforceable penalty.
Liquidated damages live or die on the estimate. A round number with no basis invites a penalty challenge; a documented forecast of a genuine, hard-to-measure loss holds up.
Red Flags
A round figure with no connection to any likely loss, which reads as a penalty and may be struck.
Liquidated damages stacked on top of the right to actual damages for the same breach.
No cure period, so a minor or quickly-fixed breach triggers the full amount.
A figure that ignores causes outside the breaching party’s control, like force majeure.
An amount that escalates with no aggregate cap.
FAQs
Related Clauses
Termination
A contractual provision that sets out how, when, and by whom a contract can be ended before its natural expiration.
Force Majeure
A contractual provision that excuses performance when an extraordinary event prevents one or both parties from fulfilling their obligations.
Indemnification
A contractual provision in which one party agrees to cover specified losses or third-party claims that the other party incurs.
Limitation of Liability
A contractual provision that caps the amount and types of damages one party can recover from the other.
Severability
A contractual provision that keeps the rest of a contract in force if a court finds one part invalid or unenforceable.
This content is for informational purposes only and does not constitute legal advice.