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What Are Liquidated Damages?

Liquidated damages refer to money as compensation for the death of a person, injury to a person or to his rights or property. The amount is awarded by the court or through a contract stipulation when breach of contract is involved.

In most contracts, a liquidated damages stipulation is included. A specific amount is stated in the document requiring the party who fails to fulfill the terms of the contract to pay the sum.

In order for damages to be liquidated in contract issues, certain conditions must be met. One is if injury could not be ascertained or quantified. Secondly, if the amount is found to be reasonable taking into account the actual harm caused. And thirdly, if the damages are meant to be as what they’re supposed to be and not serve only as a penalty or punishment.

The liquidated damages stipulation is aimed at protecting the two parties involved in the contract. This is regardless of their status in the contract. In real estate contracts, they can be the buyer and the seller. In employment contracts, they can be the employer and the employee.

In real estate transactions, the liquidated damages clause is very common. It serves an important purpose for both parties. For the buyer, it puts a limit to their loss in the event he or she defaults. On the part of the seller, the clause calls for a preset amount in the form of the buyer’s deposit which could no longer be claimed should the buyer defaults in his payment.

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