Liquidated damages

Definition

Liquidated Damages are a variety of actual damages.

Most often, the term "liquidated damages" appears in a contract, and often is the title for a whole clause or section.

Parties to a contract use liquidated damages where actual damages, though real, are difficult or impossible to prove.

Liquidated damages are sometimes not imposed, if the defendant can show that the liquidated damages clause was included as punishment for failing to keep contract terms, instead of covering unprovable damages, i.e. punitive damages.

Example

Undisclosed source code has value as a trade secret. Openly publishing the source code destroys the trade secret value. The trade secret value of source code is difficult or impossible to prove. There is no open market for "secret source code".

In the 1997 equity case of Sun Microsystems, Inc. vs. Microsoft, plaintiff Sun made several damage claims. One was for US$35 million in liquidated damages for Java source code disclosure, a contract violation. The case was later settled on terms, including a US$20 million payment by Microsoft to Sun.

Related terms

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