What are liquidated damages?

Where a party to a contract breaches that contract, the non-breaching party is usually entitled to, among various possible remedies, an award of damages as a remedy. An award of damages is granted to compensate the non-breaching party for the loss and/or damage that arose as a result of the breach.

During contractual negotiations, the parties are free to stipulate the amount that a party must pay if it
breaches the contract. That stipulation (specific or otherwise) is commonly referred to as a 'liquidated damages clause'. It is generally regarded that the inclusion of a liquidated damages clause in a commercial contract is an acceptable arrangement for the parties to agree and to be held enforceable by the courts.

In 2012 the High Court of Australia re-defined the elements required to establish whether a liquidated damages clause is enforceable or not – refer to the
doctrine of penalties section.

Liquidated damages clauses have also been referred to as 'agreed remedies clauses', 'agreed damages clauses', 'pre-estimated damages clauses', 'stipulated damages clauses', 'adjustment of time costs' or 'liquidated and ascertained damages clauses'.

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