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A liquidated damages clause is a clause that provides for a set sum to be paid to the innocent party when the other contracting party has breached the contract. Whether such a clause is enforceable will depend on whether the courts construe it as a liquidated damages clause (enforceable) or a penalty (unenforceable).
The test for what constitutes a liquidated damages clause is currently set out in the Supreme Court decision of ParkingEye v Beavis; Cavendish v El Makdessi.
If this sum is a genuine pre-estimate of the loss that is likely to flow from the breach, it will represent agreed damages, called liquidated damages, and will be recoverable without the need to prove the actual loss suffered. However, in light of the Supreme Court's decision in ParkingEye, the fact that the clause does not represent a genuine pre-estimate of loss is not necessarily fatal to it being enforceable. Rather, the court will consider the factors as to legitimate interest and whether the clause seeking to serve such legitimate interest is extravagant, exorbitant or unconscionable, see section: Contract interpretation—distinguishing between liquidated damages and penalty clauses—A
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