Under the common law, liquidated damages may not be set so high that they are penalty clauses rather than fair compensation.
 Uniform Commercial Code In the United States, Section 2-718(1) of the Uniform Commercial Code provides that, in contracts for the sale of goods: Damages for
breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility
of otherwise obtaining an adequate remedy.
Thus, they are most appropriate when (a) the parties can agree in advance on reasonable compensation for breach, but (b) the court would have a difficult time determining
fair compensation at the time of breach.
The OFT said it would be up to a court to determine such an amount based on the established legal precedent that the only recoverable cost would be actual costs incurred.
The amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term  as assessed at the time when the
agreement of contract was entered into.
Case law In the case of construction contracts, courts have occasionally refused to enforce liquidated damages provisions, choosing to follow the doctrine of concurrent
delay when both parties have contributed to the overall delay of the project.
The last chapter of the bank fees saga took place in July 2016 where the High Court dismissed the appeal for leave and held that the full court was correct to characterise
the loss provision costs, regulatory capital costs and collection costs as affecting the legitimate interests of the Bank.
The court found that although the liquidated damages clause may have been based on a genuine pre-estimate of loss at the time the MoU was agreed, it had not been reviewed
or amended at the times when the agreement was amended and therefore was unenforceable.
 Contracts under common law require there to have been some attempt to create an equal or reasonably proportionate quota between the damages made and the actual loss.
In 2015, the full court overturned Justice Gordon’s first instance judgment that credit card late payment fees charged by ANZ to its customers constituted penalties at law
and equity (and were therefore largely unenforceable).
The damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.
 One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance.
 The Court asserted that the fact that those categories of costs could not be recovered in an action for damages did not alter that conclusion.
The aggrieved party may demand either the stipulated damages or performance of the principal obligation, but may not demand both except for delay.
The purpose of a liquidated damages clause is to increase certainty and avoid the legal costs of determining actual damages later if the contract is breached.
 For a liquidated damages clause to be upheld, two conditions must be met.
The High Court found that fees were not incapable of being characterised as penalties merely because they were not charged upon breach of contract.
The definition and scope extended In Australia, the definition of liquidated damages applies to the situations where upon the failure of a primary stipulation, imposes
a detriment to the first party or a benefit to the second party by a secondary stipulation collateral to the primary stipulation (i.e.
Common law Generally, at common law, a liquidated damages clause will not be enforced if its purpose is to punish the party in breach rather than to compensate the injured
party, in which case it is referred to as a penal or penalty clause.
Judges may adjust excessive contract penalties, but such clauses are not generally void as a matter of French law.
High Court Other legal systems Civil law Civil law systems generally impose less severe restrictions on liquidated damages.
Liquidated damages, also referred to as liquidated and ascertained damages (LADs), are damages whose amount the parties designate during the formation of a contract
for the injured party to collect as compensation upon a specific breach (e.g., late performance).
Further, neither the fact that the late payment fees were not genuine pre-estimates of damage nor the fact that the amounts charged were disproportionate to the actual loss
suffered by itself rendered the late payment fees penalties.
 When damages are not predetermined/assessed in advance, then the amount recoverable is said to be “at large” (to be agreed or determined by a court or tribunal in the
event of breach).
[‘Barker, C., Construction: Law: Liquidated Ascertained Damages (LADs), published 14 August 2018, accessed 15 May 2020
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14. ^ “§ 2-718. Liquidation or Limitation of Damages; Deposits”. Legal Information Institute. 2012-11-20. Retrieved 17 March 2015.
15. ^ “The Office of Fair Trading: OFT welcomes High Court
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and New Zealand Banking Group Limited v Paciocco  FCAFC 78 (5 June 2015), Federal Court (Full Court) (Australia).
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27 July 2016.
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21. ^ Louisiana Civil Code, Article 2005: Parties may stipulate the damages to be recovered in case of nonperformance, defective performance, or delay in performance of an obligation. http://legis.la.gov/Legis/LawSearchList.aspx
accessed 23 June 2015
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23. ^ Louisiana Civil Code, Article 2007,
accessed 23 June 2015
24. ^ Louisiana Civil Code, Article 2012 http://legis.la.gov/Legis/Law.aspx?d=109269 accessed 23 June 2015. See also Isom, H. Chervis. “Specific Performance: The Importance of a Clear Liquidated Damage Provision”. Baker Donelson.
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