Contracts & ExecutionQuestion 825 of 1605
A liquidated damages clause in a construction contract is best described as:
a.A penalty designed to punish the contractor
b.A pre-agreed reasonable estimate of damages payable if a specified breach (often late completion) occurs
c.A clause that liquidates (sells off) the contractor's assets
d.A clause forbidding any damages at all
Explanation
A liquidated damages clause fixes, in advance, a reasonable estimate of the damages one party will owe if a specified breach occurs, most commonly a set dollar amount per day of late completion. It is enforceable when actual damages would be difficult to calculate and the amount is a reasonable forecast, not a penalty. Courts refuse to enforce clauses that are actually penalties, and the clause is unrelated to liquidating assets or barring damages.
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Reviewed by Abraham Chen — Licensed California General Contractor (CSLB License #1101856 — verify)