What is the Difference Between Liquidated Damages and Damages?

The main difference between liquidated damages and damages lies in the way they are determined and the purpose they serve in a contract.

Liquidated Damages:

• Liquidated damages are a predetermined amount of money or a set formula to calculate the amount of money that a party will owe if it breaches a contract, aiming to compensate the injured party for its losses.
• They are used when actual damages are difficult or impossible to prove.
• Parties to a contract agree upon the liquidated damages clause, which is included in the contract and must be clearly stated.
• Liquidated damages are meant to be fair and not punitive.
• They provide certainty and predictability to the parties involved in the contract and save time and resources that would otherwise be spent on litigation determining compensatory damages.

Damages (also known as General Damages):

• Damages are an amount determined after the delay occurs, based on the actual losses incurred by the non-breaching party.
• Damages must be foreseeable and not too remote.
• The party claiming general damages is required to prove its actual losses caused by the delay.
• Damages are subject to an overall liability cap in some cases.

In summary, liquidated damages are a predetermined amount or formula agreed upon by the parties in a contract to compensate for breaches, while damages are determined after the delay occurs based on the actual losses incurred. Liquidated damages provide certainty and predictability, whereas damages can be more uncertain and depend on the actual losses suffered by the non-breaching party.

Comparative Table: Liquidated Damages vs Damages

Here is a table comparing liquidated damages and unliquidated damages:

Liquidated damages are predetermined amounts of compensation that are agreed upon by both parties at the time of contract formation, in the event that one party breaches the contract. They are designed to provide certainty and predictability in case of a breach. On the other hand, unliquidated damages are not predetermined and require proof of actual damages incurred by the non-breaching party. The purpose of liquidated damages is to provide certainty and encourage resolution without litigation, while unliquidated damages aim to compensate the non-breaching party for actual losses incurred due to the breach.