LD’s ... as easy as 1, 2, 3

A liquidated damages, or LD, clause will commonly feature in a contract involving the delivery of a good or service within a stipulated time frame and will be activated when delivery is late. However, it can also be used for other breaches. It is a powerful contractual mechanism, but needs to be drafted correctly in order to be effective.

The key issue when drafting a LD clause is to ensure that the amount of damages stated to be due in the event of breach is a genuine pre-estimate of the loss that the non-breaching party will actually suffer. If it is anything more, you have wasted your time as the clause will be deemed to be a penalty provision and unenforceable at law. This could really impact on the risk profile of the contract so it is worth spending some time to get right.