What are liquidated damages and when are they available?

“Liquidated damages” refers to a sum stipulated and agreed upon by the parties, at the time of entering into the contract, as being payable as compensation for injuries in the event of a breach.  To be enforceable, the damages which the parties might reasonably anticipate must be difficult to ascertain because of their indefiniteness or uncertainty and the amount stipulated must be either a reasonable estimate of the damages that would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.  A liquidated damages clause that does not meet this test will be regarded as a “penalty” and will be unenforceable.