Liquidated Damages and Penalty Clauses

Written by Richard O'Shea, Solicitor TEP · Mary Molloy Solicitors, established 1981 · Last reviewed 21 August 2026

The bargain: certainty for both sides

A liquidated damages clause fixes in advance what one party pays for a defined breach — classically, a weekly rate for late completion in building contracts. The innocent party is spared proving actual loss; the breaching party can price its exposure. Courts enforce the agreed sum without asking what the real loss was — provided the clause is not a penalty.

Where Irish law draws the line

The traditional test asks whether the sum was a genuine pre-estimate of loss at the time of contracting, or a sum held over the other party's head to compel performance — extravagant and unconscionable in comparison with the greatest loss conceivably flowing from the breach. England's courts reformulated their approach in Cavendish v Makdessi (legitimate interest / proportionality); Irish courts have engaged with that development — notably in Sheehan v Breccia — while continuing to apply the established genuine pre-estimate framework. The practical position for drafters in Ireland: a sum you can rationally connect to expected loss, documented at the time, is safe territory; a deliberately deterrent sum is not.

Drafting sums that survive

• Keep a contemporaneous note of how the figure was built (alternative accommodation costs, lost rent, financing) — the challenge, if it comes, asks what you estimated then
• Rate the sum to the breach: one weekly delay rate cannot sensibly cover both a one-week and a one-year overrun of wildly different projects — scale it
• Never fill in "nil" carelessly: in some standard forms a nil entry can mean no delay damages at all rather than at-large damages
• Cap the accumulation if you are the paying side (a percentage of the contract sum)
• Remember the alternative: if the clause fails as a penalty, the innocent party is back to proving actual loss — worse for both sides than an honest figure