# Liquidated damages

Source: https://contracko.com/glossary/liquidated-damages

# Liquidated damages

A pre-agreed sum payable on breach, set in advance instead of proving actual loss.

## Definition

Liquidated damages are a sum the parties agree in advance will be payable if a specified breach occurs, sparing the need to prove actual loss. In Dutch law this is the boetebeding (penalty clause), recognised in articles 6:91 to 6:94, where the agreed amount can replace or supplement statutory damages. A court may, under article 6:94, moderate a penalty that is manifestly excessive in the circumstances.

## Example

> A construction contract sets €2,500 per day of late completion as liquidated damages; the client need not prove its exact losses to claim them.

## Why this is a business risk

An uncapped liquidated-damages clause can transform a performance failure into a catastrophic financial liability. Suppliers who sign contracts without checking whether penalties are proportionate to the contract value may find themselves facing claims that dwarf their fee. Customers who set the figure too low may find it is insufficient to cover actual losses and have waived the right to claim the difference.

## How to manage it

- Cap liquidated damages as a percentage of contract value (e.g. 10-20%) so they remain commercially proportionate.
- State whether liquidated damages are the sole remedy for the specified breach or whether the injured party can also claim actual loss above that figure.
- Set the daily or weekly rate with reference to the genuine pre-estimate of harm; a rate that is purely punitive may be reduced by a Dutch court.
- Track trigger events centrally so you know when a penalty clock has started and can act before it accumulates unduly.

### How Contracko helps

Contracko extracts liquidated-damages clauses, their triggers, daily rates, and caps as searchable contract metadata. Obligation tracking can alert you when a milestone is at risk of being missed so you can take corrective action before a penalty clause is triggered.

## Legal references

- [BW 6:91 Dutch Civil Code: penalty clause Dutch law](https://wetten.overheid.nl/BWBR0005289)
- [BW 6:94 Dutch Civil Code: judicial moderation of penalty Dutch law](https://wetten.overheid.nl/BWBR0005289)

Unless marked otherwise, references are to Dutch law (Burgerlijk Wetboek, the Dutch Civil Code); EU instruments such as the GDPR apply across the EU. This is general information, not legal advice. Other jurisdictions treat these concepts differently. Verify the current text and your situation with a qualified lawyer.

## Relevant for

[Construction](https://contracko.com/industries/construction-industry)[Logistics & Distribution](https://contracko.com/industries/logistics)[Manufacturing](https://contracko.com/industries/manufacturing)[Engineering & Architecture](https://contracko.com/industries/engineering)

## Related clauses

- [Liquidated Damages Clause](https://contracko.com/clause-library/liquidated-damages)
- [Service Level Agreement (SLA)](https://contracko.com/clause-library/service-level-agreement)
- [Termination for Cause Clause](https://contracko.com/clause-library/termination-for-cause)

## Related terms

- [Breach of contract](https://contracko.com/glossary/breach-of-contract)
- [Liability](https://contracko.com/glossary/liability)
- [Service level agreement (SLA)](https://contracko.com/glossary/sla)

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## Frequently asked questions

Common questions about this term.

- **Q:** Can a Dutch court reduce an agreed penalty?
  **A:** Yes. Under article 6:94 BW a court may moderate a penalty if fairness manifestly requires it, for example where it is grossly disproportionate to the actual harm.

- **Q:** Do you need to prove actual loss to claim liquidated damages?
  **A:** No. The whole point of a liquidated-damages clause is to fix the recoverable sum in advance, making proof of loss unnecessary. This is particularly valuable for hard-to-quantify losses such as delayed project completion.

- **Q:** Is there a difference between liquidated damages and a penalty under Dutch law?
  **A:** Dutch law uses boetebeding for both concepts under BW 6:91-94. A court may moderate a grossly excessive penalty under 6:94, whether it was intended as compensation or punishment.

- **Q:** Can liquidated damages accumulate without a cap?
  **A:** Yes, unless the contract sets a cap. Without one, daily penalties can accumulate indefinitely until the breach is cured or the contract is terminated. Always negotiate a cap to limit total exposure.

- **Q:** Are liquidated damages common in SaaS contracts?
  **A:** Less so than in construction. SaaS contracts more commonly use service credits for SLA misses, which serve a similar function but are typically self-executing and much smaller in scale than construction-style liquidated damages.

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