What is a liquidated damages clause?

A liquidated damages clause is a provision in a contract that outlines the amount of damages that must be paid if a party fails to fulfill their obligations under the contract. In North Carolina, liquidated damages clauses are used to ensure that the amount of damages payable by the party in breach is fair and reasonable. A liquidated damages clause serves to reduce any potential dispute concerning the amount of damages due, and it also guards against damages that may be too difficult to prove or quantify. In order for a liquidated damages clause to be valid under North Carolina law, the clause must meet certain requirements. First, the damages stated must be a reasonable estimate of the actual damages that could result from a breach and not put the non-breaching party in a better position than they would have been if the contract were performed. Second, the clause must not be punitive or penal in nature. This means that the damages cannot be so high that they act as a deterrent for the breaching party. For a liquidated damages clause to be enforceable, it must also be in writing and signed by both parties. This is necessary to make sure that both parties agree to the language of the clause prior to entering into the contract. Once the damages have been properly calculated and agreed upon, it is binding on both parties.

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