Can a court reduce liquidated damages?

Yes, in most legal systems of the region and in France, where the amount is clearly excessive or the contract was partly performed. Setting a reasonable amount from the outset is the best way to have it enforced as written.

What is the difference between liquidated damages and late payment interest?

Late payment interest compensates delay in paying a sum of money and often follows its own statutory rules. Liquidated damages sanction other breaches, such as late delivery or breach of exclusivity.

Is formal notice required before claiming liquidated damages?

Generally yes, unless non-performance is definitive or the contract expressly states that missing the deadline is enough. A dated written notice remains the safest practice.

Clause templatesPayment

Liquidated damages (penalty) clause

A liquidated damages clause, known in civil-law systems as a penalty clause, fixes in advance a sum payable on breach: late delivery, breach of exclusivity, early exit. It simplifies recovery and encourages performance. In most countries of the region, however, a court can reduce it if it is clearly excessive.

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Clause template

1. In the event of [BREACH CONCERNED: late delivery / breach of exclusivity / other], [NAME OF OBLIGED PARTY] shall pay [NAME OF OTHER PARTY], as liquidated damages, the sum of [AMOUNT] per [DAY / WEEK] of delay [OR: a lump sum of AMOUNT]. 2. Liquidated damages become due after formal notice has remained without effect for [NUMBER] days, except where non-performance is definitive. 3. Total liquidated damages for delay are capped at [PERCENTAGE]% of the total contract price. 4. Payment of liquidated damages does not release the defaulting party from its obligation to perform, unless otherwise agreed. 5. Liquidated damages [ARE / ARE NOT] the sole remedy for the breach concerned. [IF NOT: the other party may claim further proven loss.]

Replace the bracketed items before use.

Variants

Single lump-sum version

In the event of breach of the obligation of [OBLIGATION], the defaulting party shall pay the other party an agreed sum of [AMOUNT] per breach established. This sum is a genuine pre-estimate of the loss and may not be combined with other damages for the same breach.

When to use it

Late delivery or go-live would cost you money that is hard to quantify.
You want a sanction for breach of exclusivity or non-solicitation.
You let premises or equipment and want to deal with late return.
You grant a payment plan and want a clear consequence for late instalments.

Mistakes to avoid

Setting an amount out of proportion to what is at stake: the court will reduce it and the clause loses its deterrent effect.
Forgetting a cap, which turns a simple delay into an unlimited debt.
Not stating whether the sum is in addition to performance and to other damages.
Applying a penalty to a plain money debt in a country that prohibits this or treats it as interest.

Country-specific notes

France
The court may, even of its own motion, reduce or increase a penalty that is manifestly excessive or derisory, and reduce it for partial performance; except for definitive non-performance, the penalty is due only after formal notice (art. 1231-5 of the Civil Code).
Source: Lefebvre Dalloz, « Clause pénale » fact sheet
United Arab Emirates
According to Mayer Brown, the new Civil Transactions Law (in force since 1 June 2026) allows agreed compensation to be reduced if excessive, on partial performance or where the creditor is at fault, and increased only for fraud or gross fault; any clause excluding this control is void (art. 340).
Source: Mayer Brown, « Examining the New UAE Civil Code – Part 4: Compensation and Damages »
Saudi Arabia
The Civil Transactions Law allows agreed compensation except for monetary obligations; it is not payable if the debtor proves no loss, may be reduced if excessive or on partial performance, and increased for fraud or gross negligence (arts. 178 and 179).
Source: Gibson Dunn, « Liquidated Damages Made Simple: What Saudi Arabia's Civil Transactions Law Says »
Egypt
The Egyptian Civil Code provides that agreed damages are not due if there is no loss, that the court may reduce them if grossly exaggerated or on partial performance, and that any contrary agreement is void (art. 224).
Source: Gibson Dunn, « Liquidated Damages Made Simple: What Saudi Arabia's Civil Transactions Law Says » (cites art. 224 of the Egyptian Civil Code)

Contracts that use this clause

Frequently asked questions

Yes, in most legal systems of the region and in France, where the amount is clearly excessive or the contract was partly performed. Setting a reasonable amount from the outset is the best way to have it enforced as written.

Other Payment clauses

Sources

Indicative template, to adapt to your situation. It does not replace legal advice.

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Liquidated damages (penalty) clause

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Mistakes to avoid

Setting an amount out of proportion to what is at stake: the court will reduce it and the clause loses its deterrent effect.

Forgetting a cap, which turns a simple delay into an unlimited debt.

Not stating whether the sum is in addition to performance and to other damages.

Applying a penalty to a plain money debt in a country that prohibits this or treats it as interest.

Country-specific notes

France

The court may, even of its own motion, reduce or increase a penalty that is manifestly excessive or derisory, and reduce it for partial performance; except for definitive non-performance, the penalty is due only after formal notice (art. 1231-5 of the Civil Code).

Lefebvre Dalloz, « Clause pénale » fact sheet

United Arab Emirates

According to Mayer Brown, the new Civil Transactions Law (in force since 1 June 2026) allows agreed compensation to be reduced if excessive, on partial performance or where the creditor is at fault, and increased only for fraud or gross fault; any clause excluding this control is void (art. 340).

Mayer Brown, « Examining the New UAE Civil Code – Part 4: Compensation and Damages »

Saudi Arabia

The Civil Transactions Law allows agreed compensation except for monetary obligations; it is not payable if the debtor proves no loss, may be reduced if excessive or on partial performance, and increased for fraud or gross negligence (arts. 178 and 179).

Gibson Dunn, « Liquidated Damages Made Simple: What Saudi Arabia's Civil Transactions Law Says »

Egypt

The Egyptian Civil Code provides that agreed damages are not due if there is no loss, that the court may reduce them if grossly exaggerated or on partial performance, and that any contrary agreement is void (art. 224).

Gibson Dunn, « Liquidated Damages Made Simple: What Saudi Arabia's Civil Transactions Law Says » (cites art. 224 of the Egyptian Civil Code)