You might hear the term “liquidated damages” a lot when referring to things like delays in construction, but it can be hard to understand exactly what that means. In essence, liquidated damages are the expenses paid by a party—in the case of construction delays, a construction company or individual worker—responsible for the failure to commit to terms laid out in a contract. This assumes that the contract was made within legal standards and in good faith.
A penalty is the contractual agreement made at signing that stipulates what will be paid if a party fails to hold up their end of the contract. The word “penalty”, then, does not refer to the actual losses, but rather to the agreed upon measures for handling any failure that may come up. This is similar to a “fine” for traffic violations, for example.
However, the United States court system has exhibited some confusion in regards to the use of the Liquidated Damages clause. The concern in the case of construction scenarios is that sometimes, the actual losses experienced by a failure or delay are lesser or greater than the penalty stipulated in the contract.
In England and Australia, on the other hand, courts tend to stick rigidly to the terms agreed upon in the contract, instead of considering the possible disparity between the two figures.
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