GLOSSARY

Liquidated Damages

A sum specified in a contract where the damages to be paid for a breach are difficult to estimate; common in contracts for goods and services.

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What is Liquidated Damages?

Liquidated damages are a predetermined amount of money that’s paid as compensation for a breach of contract. They are normally included in a contract as a way to prevent the uncertainty and expense of proving actual damages in court.

Liquidated damages are enforceable if they’re:

Reasonable: When compared to the anticipated or actual harm caused by the breach.
Not a penalty: The sum of money that’s designed to punish the breaching party rather than compensate the injured party.
In writing: Both parties agreed and signed a contract.

If liquidated damages are found to be unreasonable or a penalty, they may be reduced by a court.

Some benefits of using liquidated damages include:

Certainty and predictability.
They can avoid litigation costs.
Enforceable by the courts.

Some drawbacks of using liquidated damages include:

Difficult to prove.
They may not be enough to compensate the injured party.
They may be seen as unfair.

For importers, a common situation where liquidated damages come into play involves customs bonds. The bond is a way for the CBP to guarantee it will receive payment of all duties, taxes, and charges due on the imported merchandise.

If an importer fails to comply with regulations, the CBP can issue a claim for liquidated damages. This claim is essentially a fine. For example, if an importer doesn't complete the necessary paperwork or deliver goods on time as required by the terms of the customs bond, they could be assessed liquidated damages.

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