What is a liquidated damages clause?

A liquidated damages clause is a provision in a contract that states a set amount of money that a party must pay if they breach (break) the contract. This clause is common in contracts such as construction or lease agreements. In South Carolina, liquidated damages clauses must be included in a contract for them to be enforceable. The clause must include a reasonable amount of damages that would be due and must represent an honest attempt at damage estimation. The clause must also not be a penalty, meaning that it must represent a genuine effort at compensating the non-breaching party for actual losses. In the event of a breach, the non-breaching party can attempt to collect damages by filing a civil lawsuit and presenting the liquidated damages clause to the court. The court will then determine if the amount of liquidated damages stated in the clause is reasonable, or if the amount should be reduced. In addition to the requirement that the liquidated damages clause must be reasonable, a court may also require additional evidence that the parties negotiated the contract in good faith in order to prove that the clause is enforceable. This is another important consideration that parties should take into account when negotiating and drafting contracts with liquidated damages clauses.

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