Definition
Liquidated damages clauses specify upfront how much compensation someone gets if you breach—usually your earnest money. This avoids disputes about actual damages.
Not sure where this fits?
Answer a few questions and we’ll open the path that fits, at the right step.
Find my pathAbout this term
Liquidated damages clauses specify the amount of compensation (usually earnest money) that the non-breaching party receives if there's a breach. This provides clarity and avoids disputes about actual damages. However, liquidated damages must be a reasonable estimate of anticipated harm—courts may reject them if they're punitive or excessive. In many residential transactions, earnest money serves as liquidated damages when the buyer breaches.
Pro Tip
Know what happens to earnest money if you breach. This could be significant loss.
Example
The contract specified that earnest money was liquidated damages if the buyer failed to close without valid contingencies.