A liquidated damages clause is a provision in a contract specifying an amount (“liquidated damages”) to be paid by a party if the party breaches the contract. Such clauses are common in all types of contracts, particularly in the oil and gas industry.
If a contractor promises to complete construction of a building by an agreed date and fails to do so, the contract may provide for a payment of an agreed amount for each day completion is delayed. If a party promises to drill a well in a lease or agreement, the parties may agree that, if the well is not drilled, the defaulting party will pay an agreed amount as damages.
The basic principle underlying contract damages is compensation for losses sustained and no more.