Agreed damages: Overview, definition and example
What are agreed damages?
Agreed damages, also known as liquidated damages, refer to a pre-determined amount of money that one party agrees to pay the other in case of a contract breach. This amount is agreed upon by both parties in advance and is meant to cover the damages that may arise from the breach. Agreed damages are typically specified in the contract to avoid disputes about the amount of compensation due after a breach occurs.
Why are agreed damages important?
Agreed damages are important because they provide clarity and certainty for both parties in the event of a breach. Instead of having to prove the actual damages suffered, the parties already know the amount that will be paid if the contract is violated. This can help streamline dispute resolution, reduce legal costs, and provide a fair remedy for breaches without lengthy negotiations or court proceedings.
Understanding agreed damages through an example
Imagine a construction company signs a contract to complete a project by a specific deadline. The contract includes an agreed damages clause, stating that the company must pay $500 for every day the project is delayed beyond the deadline. If the company finishes the project five days late, it would owe $2,500 in agreed damages.
In another scenario, a supplier enters into a contract with a retailer to deliver goods on a specific date. The agreement includes an agreed damages provision of $1,000 for every day the delivery is late. If the supplier fails to meet the deadline by three days, the retailer is entitled to $3,000 in agreed damages as compensation.
Example of an agreed damages clause
Here’s how an agreed damages clause might appear in a contract:
“In the event of a delay in delivery, the Supplier agrees to pay the Buyer $200 for each day the goods are delayed beyond the agreed delivery date, up to a maximum of $5,000.”
Conclusion
Agreed damages provide a practical and efficient way for parties to handle potential breaches in a contract. By specifying the amount of compensation in advance, both parties can avoid lengthy disputes and ensure that there is a clear understanding of the consequences of failing to meet contract terms.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.