Liquidated Damages

Liquidated damages (often abbreviated LDs) are a sum stipulated inside a contract that the parties agree will be paid if a specified breach occurs — most commonly late delivery, missed construction milestones, or failure to meet performance benchmarks. The clause spares the innocent party from having to prove actual loss in court and gives the breaching party advance certainty about its exposure.

Common law jurisdictions distinguish liquidated damages from penalties. A clause is enforceable as liquidated damages only if it represents a genuine pre-estimate of likely loss, not an in terrorem sum designed to coerce performance. The classic English test was set out in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. The UK Supreme Court reformulated the test in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, asking whether the clause imposes a detriment "out of all proportion to any legitimate interest" of the innocent party. In the United States, §2-718 of the Uniform Commercial Code and Restatement (Second) of Contracts §356 permit liquidated damages where the amount is reasonable in light of anticipated or actual harm and actual damages would be difficult to prove.

Civil law systems generally treat such clauses more permissively. Under the French Civil Code (art. 1231-5) and the German BGB (§§339–345), courts may reduce a manifestly excessive stipulated sum rather than strike it out entirely.

Typical features include:

• Daily or weekly rates for delayed completion (frequent in FIDIC construction contracts).
• Caps limiting the aggregate LDs payable, often as a percentage of contract value.
• Sole-remedy language stating LDs are the exclusive remedy for the specified breach.

For Model UN and policy researchers, LDs appear in state-contracting contexts — sovereign procurement, defence offsets, and infrastructure concessions — where disputes over enforceability often end up in international arbitration under ICC, LCIA, or UNCITRAL rules.