What Is a Liquidated Damages Clause?

Definition: Specifies a predetermined amount of money that must be paid as damages for failure to perform under a contract.

Also called delay damages, stipulated damages, or (in construction) simply “LDs.”

What this clause actually does

A liquidated damages clause fixes the compensation for a defined failure in advance, so that neither side has to prove actual loss. Common shapes: a daily or weekly rate for late delivery or late completion; a fixed sum per breach of a confidentiality or non-solicitation obligation; a percentage of contract value for early termination; a per-record or per-incident figure.

A well-drafted one is genuinely useful to both sides. You know your maximum exposure; they know what they will recover; nobody litigates about quantum. The problems all come from three specific drafting choices.

The three choices that decide everything

1. Is there an aggregate cap? A per-day rate with no total limit runs indefinitely. A long delay can produce a figure larger than the contract itself.
2. Is it the sole remedy, or an additional one? “In addition to all other remedies available at law” means you pay the fixed sum and face a damages claim for the same failure. “Sole and exclusive remedy” is the phrase that makes the clause do its job.
3. Is it inside the liability cap? If liquidated damages are carved out of the cap, the cap does not limit your largest predictable exposure.

Where it bites

• Delay you did not cause. If the clause does not excuse delay caused by their late approvals, late information, late site or system access, a change order, or a force-majeure event, you are paying for their bottleneck.
• No grace period. Some clauses accrue from the first hour past the date.
• Interaction with “time is of the essence.” Together, these can make a single missed date both a payable sum and a termination trigger.
• Unilateral set-off. A right to deduct the amount from invoices they owe you, without notice and without anyone deciding whether the failure occurred, converts a disputed claim into a cash-flow event.
• Restrictive-covenant versions. A fixed sum per breach of a non-compete or non-solicit can be very large relative to the value of the underlying work, and the trigger is often defined broadly.
• Automatic triggers with no cure right. “Any delay” leaves no room to fix something the same afternoon.
• The clock does not stop. If the rate accrues until acceptance rather than until submission for review, their review time is on your meter.

What to negotiate

• An aggregate cap on total liquidated damages, and a stated relationship to the overall liability cap.
• “Sole and exclusive remedy” for the failure it covers.
• A grace period before the rate starts accruing.
• Day-for-day relief for delay caused by the other party, by a change order, by inputs or approvals they owe you, or by force majeure.
• A mutual equivalent where the delay can run in the other direction — late approvals, late payment, late provision of access.
• Ask how the figure was calculated. A rate that reflects a written estimate of the cost the delay actually causes them is defensible; a round number nobody can explain is worth questioning, and asking the question before signing is worth more than arguing about it afterwards.
• Stepped rates — lower early, higher later — rather than one aggressive flat rate.
• A cure right and a notice requirement before the clause triggers.
• Define when the clock stops — on submission for review, not on completion of their review.
• No unilateral set-off without notice and a short dispute window.

What a reasonable version looks like

A rate tied to a genuine estimate of the cost of the failure; a grace period; automatic day-for-day extension for causes attributable to the other party or to force majeure; an aggregate cap that sits in a stated relationship to the liability cap; status as the sole and exclusive remedy for that failure; a defined stop-the-clock event; and no set-off without notice.

What to push back on hardest

• An uncapped per-day rate.
• A fixed sum “in addition to all other remedies and without proof of loss,” with no cap.
• Liquidated damages plus a termination right plus a general damages claim for the same failure.
• Amounts accruing for delays caused by their own late inputs.
• Liquidated damages expressly carved out of the liability cap.
• Unilateral deduction from your invoices with no notice and no dispute process.
• No pause during a force-majeure event.

Questions worth asking before you sign

• What exactly triggers this, and from what moment?
• What is the rate, and is there a total cap?
• Is it the only remedy for that failure, or an extra one?
• What happens if the delay is caused by you?
• Does force majeure pause it?
• Is it inside the liability cap?
• Can you deduct it from my invoices before anyone agrees I was late?
• How was the figure calculated?

Related clauses

• “Time is of the essence”
• Limitation of liability
• Force majeure clause

Not legal advice. What's My Contract is not a law firm, and this page is general information about how a clause of this type is usually written — not advice about your contract, and not a statement of the law in any particular place. How a clause is read, and whether it can be relied on, depends on where you are, what the rest of the agreement says, and facts a general explainer cannot know. Before you sign, refuse, or act on any clause, have a lawyer licensed in your jurisdiction read your actual document.