What is the definition of liquidated damages?

Liquidated damages are a pre-agreed financial sum that is written into a contract to compensate one party if the other breaches a specific obligation. For example, a commercial shopping centre doesn’t open on the planned date due to construction delays. The project is delayed, and costs pile up for the property developers. Instead of proving the loss after the fact (which complexity can render nearly impossible), and requiring a penalty to be paid (see remedies for breach), the injured party can enforce this clause and be reasonably compensated for their losses. As such, it is not considered a penalty. 

In short: why include a liquidated damages clause?

1. Certainty for both sides – Each party knows the financial risk up front, enabling clearer pricing and risk allocation.
2. Faster dispute resolution – Because the amount is predetermined, there’s no need for lengthy evidence-gathering or expert valuation.
3. Incentive to perform – The clause acts as a deterrent against delay or non-performance.

Some questions to ask when drafting the agreement

Question

Is the amount a genuine pre-estimate of loss?

Practical tip

Courts in many jurisdictions will void a clause that looks like a “penalty” (i.e. unreasonably high). Therefore, base the figure on historical data or industry benchmarks.

Question

Should the sum be a fixed amount or a daily rate?

Practical tip

Fixed amounts suit one-off breaches (missed go-live date). Daily or percentage rates work for ongoing delays (construction, SaaS uptime).

Question

Which breaches trigger payment?

Pracical tip

Be precise about the trigger events and tie the clause to measurable milestones and term: “Go-live by 1 Oct 2025,” “99.9 % uptime per calendar month,” etc.

Question

How does force majeure affect liability?

Practical tip

Carve-outs for events outside either party’s control to avoid unfair exposure.

Enforceability checklist

Write your liquidated damages clauses with 4 general principles in mind.

1. Reasonableness – The sum must reflect a realistic forecast of loss at the time of signing.
2. Symmetry – Apply liquidated damages to the party most able to control the risk (e.g., supplier delay, customer late payment).
3. Clarity – Spell out calculation method, currency, caps, and payment deadlines.
   
   
4. No double recovery – Specify that accepting liquidated damages waives further claims for the same breach.

How can Docfield CLM help?

Docfield CLM boasts a powerful integration with Birdseye. Together, we present some of the strongest pre- and post-signing capabilities in the CLM space. You gain full control and visibility over what contracts contain the clause, and ways to track against it. Some key features below: 

• Template control – Ensure all high-value templates contain up-to-date liquidated-damages language approved by Legal.
• Automated alerts – Trigger reminders as critical milestones approach, reducing the chance that delays materialise.
• Obligation tracking – Flag when performance data (delivery date, uptime metrics) crosses the threshold that activates the clause.
• Audit trail – Record calculations, approvals, and payments for compliance and future negotiations.