Liquidated Damages

Parties sometimes agree in advance what a breach will cost, typically where the actual loss would be hard to quantify: delay on a construction project, or the departure of a client following a breach of a restrictive covenant.

Tennessee courts enforce these clauses where the sum was a reasonable forecast of the likely loss at the time of contracting. Where the amount operates as a penalty designed to compel performance rather than to compensate, it may not be enforced.

Whether a clause survives is decided by looking at the position when the contract was made, not by comparing the fixed sum to the loss that eventually occurred.