Liquidated damages
Also called: LD clause, agreed damages, pre-estimated loss
A genuine pre-estimate of loss agreed in a contract, payable on a specified breach — enforceable if it is a true estimate, void as a penalty if it is extravagant.
Definition
A liquidated damages (LD) clause in a contract specifies in advance the sum payable by one party if they breach a particular obligation — most often delay clauses in construction contracts (e.g. "£5,000 per week of delay"). For such a clause to be enforceable, it must represent a genuine pre-estimate of the likely loss at the time the contract was made. The test was restated by the Supreme Court in <a href="https://www.bailii.org/uk/cases/UKSC/2015/67.html" target="_blank" rel="noopener noreferrer"><em>Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis</em> [2015] UKSC 67</a>: an LD clause will be valid if it imposes a detriment not out of all proportion to any legitimate interest the innocent party has in enforcement. This widened the traditional test, which focused solely on whether the sum was a genuine pre-estimate. A clause that is extravagant, unconscionable, or has no relationship to any legitimate commercial interest will be struck down as a penalty and is unenforceable — the innocent party is then limited to proving actual loss. In consumer contracts, a penalty clause may also be an unfair term under the <a href="https://www.legislation.gov.uk/ukpga/2015/15/contents" target="_blank" rel="noopener noreferrer">Consumer Rights Act 2015, Sch.2, Part 1</a>. Liquidated damages clauses must be distinguished from limitation of liability clauses, which cap loss rather than pre-specify it.
In practice
LD clauses are most common in construction, IT, and commercial supply contracts. If you are drafting one, ensure the pre-estimate is based on a genuine calculation at the time of contracting and document that reasoning. If you are relying on an LD clause, check whether the other side has waived their right to liquidated damages (for example by accepting late delivery without protest). See the <a href="/glossary/damages" class="body-link">damages glossary entry</a> for the general framework, the <a href="/glossary/contract" class="body-link">contract entry</a>, and the <a href="/guides/business/recovering-unpaid-commercial-invoice" class="body-link">commercial invoice recovery guide</a>.