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Simple English definitions for legal terms
liquidated damages
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A quick definition of liquidated damages:
Liquidated damages are a type of compensation that is agreed upon in a contract. They are used when it is difficult or impossible to prove the actual damages caused by a breach of contract. For example, if someone reveals a secret code that was supposed to be kept confidential, it can be hard to determine the exact value of the damage caused. In such cases, the parties agree on a predetermined amount of compensation, called liquidated damages, that will be paid if the contract is breached. However, if the liquidated damages are seen as a punishment rather than compensation, they may not be enforced.
A more thorough explanation:
Liquidated Damages are a type of actual damages that are used in contracts when it is difficult or impossible to prove the actual damages. This term is often used as the title for a whole clause or section in a contract.
For example, if a company has a trade secret in the form of source code, and someone publishes that source code, the trade secret value is destroyed. However, it is difficult to prove the exact value of the trade secret. In this case, the company can include a liquidated damages clause in the contract that specifies a predetermined amount of damages that will be paid if the trade secret is disclosed.
In the 1997 equity case of Sun Microsystems, Inc. vs. Microsoft, Sun claimed $35 million in liquidated damages for the disclosure of Java source code, which was a violation of their contract. The case was later settled, and Microsoft paid Sun $20 million.
This example illustrates how liquidated damages can be used to compensate for damages that are difficult to prove. In this case, the value of the trade secret was difficult to determine, so Sun included a liquidated damages clause in their contract to ensure they would be compensated if the source code was disclosed.