What do courts generally enforce regarding liquidated damages in contracts?

Courts generally enforce liquidated damages in contracts when they do not appear to penalize for uncertain losses. Liquidated damages are pre-determined amounts specified in a contract that a party agrees to pay if they fail to fulfill their obligations. For these provisions to be enforceable, they must reflect a genuine attempt to estimate a reasonable amount of damages that would occur as a result of a breach, rather than acting as a penalty for the breach.

When assessing liquidated damages, courts evaluate whether the amount is reasonable in relation to the anticipated harm that could arise from a breach. If the sum is excessive or designed to punish the breaching party rather than to compensate the non-breaching party for their actual loss, courts are likely to deem it unenforceable. Therefore, the critical aspect is ensuring that the liquidated damages are closely tied to potential damages expected from a breach, rather than punitive in nature. This ensures fairness and adherence to the principles governing contract law.