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What is a Liquidated Damages Clause?

Posted by attorney Todd Gallinger

Liquidated Damages are a fixed sum previously agreed upon to satisfy a specific failure in performance or breach of agreement that is specifically mentioned in the contract.

Essentially, a party fails to complete or fulfill a specifically contractual obligation, it must pay a previously agreed upon fixed sum. When there is no previously agreed fixed sum, the damages are stated to be “at large" and are to be determined by the courts or a tribunal.

Almost all California real estate purchases have provisions that liquidate the seller’s damages accounting for the buyer’s breach of contracts; in most cases, the liquidated damages equal the amount of the buyer’s deposit.

For a liquidated damages clause to be enforceable it must be reasonable to the damages suffered by the non-breaching party and the amount of damages must be difficult to calculate. Some liquidated damages clauses have been struck down by courts because they did not meet these requirements.

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