LIQUIDATED DAMAGES

a stipulated contractual amount that the parties agree is a reasonable estimation of the damages owing to one in the event of a breach by the other. EXAMPLE: Safety Corporation and Fire Prevention, Inc., enter into a long-term contract whereby Fire Prevention supplies Safety with all the sprinkler systems Safety needs. Instead of leaving a damage figure to a court decision if either party should breach the agreement, the parties include a liquidated damages clause in the contract. That clause provides both a dollar figure and a formula for calculating damages with the higher of the two figures constituting the maximum damages either party could charge. Source: Barron's Dictionary of Legal Terms, Steven H. Gifis, 5th Edition; © 2016