Liquidated damages

Proving the real financial loss from a collapsed business sale is genuinely hard — lost time, a business that had to reopen the sale process, a lease or staff that were already given notice. Liquidated damages sidestep that by fixing the number in advance, most commonly through a forfeited deposit or a stated break fee.

Where they show up in an SME deal

• A deposit that is forfeited if the buyer walks away without a valid closing condition unmet
• A break fee owed if a party exits exclusivity to pursue a competing deal
• A stated payment tied to breaching a specific covenant, such as confidentiality during the sale process

The mistake people actually make

Setting the number too high to be a genuine estimate of loss, and instead using it to punish or scare the other side out of walking away. A common law court asked to enforce a liquidated damages clause looks at whether the figure was a reasonable pre-estimate of loss at the time of signing; if it looks like a penalty designed purely to deter, a court can refuse to enforce it and the clause becomes worthless right when it is needed.

The Quebec difference

Quebec's Civil Code codifies this as a "penal clause" and takes a different approach: it is generally enforceable, including as an intentional deterrent, but the Code gives a court express statutory power to reduce a penal clause it finds abusive. Common law provinces instead ask the binary genuine-estimate-versus-penalty question described above.