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Liquidated damages are presented in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties.It is that provision allows for the payment of a specified sum should one of the parties be in breach of contract.
Typically, civil codes are based on the Napoleonic Code, which allows contracts to be enforced through the use of penalties.
When the civil code is used, there is usually no separation between provisions for liquidated damages and clauses for penalties.
One way that courts may distinguish penalties and liquidated damages is to examine how they are being used.
If the court determines the damages are actually a penalty, the provision will be voided, and the injured party will only be able to pursue actual damages caused by the contract being breached.
There will be minor differences in how jurisdictions will treat liquidated damages provisions.