When contracts are signed in Washington and one of the parties involved could incur hard-to-define or intangible losses if there was a breach, they could insist on a liquidated damages provision. The damages specified in such a provision are an estimate of anticipated losses, but they must be reasonable. If liquidated damages are excessive and do not fairly represent a possible loss, the agreement could be difficult to enforce in court.
Contracts often include liquidated damages provisions when one of the parties signing them will be given access to trade secrets or other information that is not publicly available. It is impossible to know what kind of damage the leaking of this information could cause, so requiring liquidated damages to be paid if a leak occurred would be reasonable. Outside suppliers, designers and consultants usually sign contracts that include liquidated damages provisions when they are hired to work on new products or product redesigns.
Liquidated damages provisions are different from penalty clauses because they are designed to provide compensation for an anticipated harm and not punish a party for failing to fulfill their responsibilities. Penalty clauses that include daily or weekly fines are sometimes included in construction contracts to encourage developers to complete projects on time and prevent business litigation. When parties accept that a breach may cause harm but cannot agree on a figure for liquidated damages, they could choose to include an unliquidated damages provision in the agreement they sign. If they do, and the agreement is breached, the court will determine the appropriate damages.
When a party signing a contract would suffer damages if the terms were breached but determining their losses in advance would be difficult, a liquidated damages provision could provide them with assurance. However, the amount that has to be paid if a breach occurs must be reasonable. If liquidated damages are unreasonable or used to punish, the contract may not be enforceable.