Damages, Liquidated

A genuine pre-estimate of likely loss, liquidated damages are a pre-agreed sum of money that the buyer estimates will be lost in the event of a breach of their contractual obligations by the supplier. The purpose of damages is to restore the parties to where they would have been if the breach had not occurred, so damages may not be punitive, but should relate directly to the buyer’s expected loss. The implication of liquidated damages is that the buyer needs to communicate to the supplier all the likely consequences of a potential breach, so that the supplier understands the implications of a breach of the contract. While some suppliers will seek to cap their liability, the buyer may need to make a commercial judgement about the appropriateness of transferring all of the risk to a supplier. See also Damages, Unliquidated.