These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.
The principle of requiring payments to represent damages rather than penalties goes back to the Equity courts, where its purpose was to protect parties from making Unconscionable bargains or overreaching their boundaries.
If these criteria are not met, a liquidated damages clause will be void. It serves as a punishment or as a deterrent against the breach of a contract. "One View Too Many." Boston Bar Journal 34 (April).n.
The American Law Reports annotation on liquidated damages states, "Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty" (12 A. Penalties are granted when it is found that the stipulations of a contract have not been met. an amount of money agreed upon by both parties to a contract which one will pay to the other upon breaching (breaking or backing out of) the agreement or if a lawsuit arises due to the breach.
Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract.
Generally, contracts that involve the exchange of money or the promise of performance have a liquidated damages stipulation.
The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised.
Damages can be liquidated in a contract only if (1) the injury is either "uncertain" or "difficult to quantify"; (2) the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and (3) the damages are structured to function as damages, not as a penalty. A penalty is a sum that is disproportionate to the actual harm. An investor that is long a stock may decide to sell some or all of the shares held in his portfolio for cash.Liquidating an asset is carried out when an investor or portfolio manager needs the cash to re-allocate funds or re-balance the portfolio.A portfolio comprised of stocks and bonds for an investor whose objective is to purchase a home five years from now, may have these securities liquidated in five years.The cash proceeds would then be used to make a down payment for a home.Assets are distributed based on the priority of various parties’ claims, with a trustee appointed by the Department of Justice overseeing the process.