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Law Office of James D. Lynch, PLLC

3000 Joe Dimaggio Blvd #90, Round Rock, TX 78665

info@jimlynchlaw.com

(512) 745-6347

(714) 745-3875

©2020 by Law Office of James D. Lynch, PLLC. The information contained in this website is for informational purposes and is not to be considered legal advice.  Any correspondence between you and the Law Office of James D. Lynch is not intended to create an attorney-client relationship.  Please do not send confidential information to us until after an attorney-client relationship has been established by an engagement letter signed by the proposed client and our attorney.

  • James D. Lynch

Contract Tip - Liquidated Damages

A liquidated damages clause is a provision in a contract that fixes a pre-negotiated amount of damages that will be due to one party if the other party breaches the contract. For example, if a home buyer gives the seller a $1000 deposit and later the home buyer decides not to purchase the seller’s house, the contract may state that the seller gets to keep the buyer's $1000 deposit as liquidated damages. A termination fee for canceling your cell phone contract early is another example of liquidated damages.


Liquidated damages will be enforced if:


1) the actual amount of damages is uncertain or difficult to estimate at the time the contract was formed, and

2) the amount of liquidated damages is a reasonable forecast of the actual damages that would be suffered.


A liquidated damages clause will NOT be enforceable if it is designed as a "penalty." For example, assume a school contracts with a construction company to build a new playground, and the contract states that if the playground is not completed by the deadline then the construction company will have to pay the school $1000 per day for each day the project is late. This will be an invalid liquidation clause because it is highly unlikely the school will lose $1000 per day due to the playground construction being late. This clause is not a reasonable forecast of damages, and it would therefore be viewed as a penalty. As a result, a court would not enforce this provision against the construction company.