The parties to a contract may agree in advance on amount of damages are to be paid in the event of breach by the party in default. Such pre-estimated damages are called "liquidated damages" and often incorporated into agreement by way of a liquidated damages clause. The parties should be cautious in wording of such clause because if "liquidated damages" thus agreed do not reflect genuine pre-estimate of the loss that is likely to be suffered by the injured party as a consequence of the breach; they will be considered by the court as penalties and thus unenforceable.
Clydebank Engineering and Shipbuilding Co. v Don Jose Ramos Yzquierdo y Castaneda  AC 6 per Earl of Halsbury LC at p.11:
But, on the other hand, it is quite certain, and an established principle , that the parties may agree beforehand to say, "Such and such a sum shall be damage if I break my agreement." The very reason why the parties do in fact agree to such a stipulation is that sometimes, although undoubtedly there is damage and undoubtedly damages ought to be recovered, the nature of the damage is such that proof of it is extremely complex, difficult and expensive.
Alfred McAlpine Capital Projects Ltd v Tilebox  EWHC 281 (TCC) by Jackson J at para 48:
There seem to be two strands in the authorities. In some cases judges consider whether there is an unconscionable or extravagant disproportion between the damages stipulated in the contract and the true amount of damages likely to be suffered. In other cases the courts consider whether the level of damages stipulated was reasonable. Mr Darling submits, and I accept, that these two strands can be reconciled. In my view, a pre-estimate of damages does not have to be right in order to be reasonable. There must be a substantial discrepancy between the level of damages stipulated in the contract and the level of damages which is likely to be suffered before it can be said that the agreed pre-estimate is unreasonable.
Azimut-Benetti SpA v Healey  EWHC 2234 (Comm) by Blair J at para 29:
[T]he purpose of the clause was not deterrent, and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder This was a contract for the construction and sale of a very expensive yacht, aptly described in the evidence as a "super-yacht". Both parties had the benefit of expert representation in the conclusion of the contract. The terms, including the liquidated damages clause, were freely entered into. As the authorities referred to above show, in a commercial contract of this kind, what the parties have agreed should normally be upheld.
Bluewater Energy Services BV v Mercon Steel Structures BV  EWHC 2132 by Ramsey J at para 1231:
In the present case it was not possible to put a precise figure on the damages but, rather, the relevant sums needed to be assessed by people who were experienced in such projects, as they were in this case. I have no doubt that this is what [experts] did and they were trying to reflect a pre-estimate of loss in the figures they agreed. I do not consider that in the context of this project the sums of €20,000 to €50,000 can be described as being unconscionable in terms of being extravagant or exorbitant. They were clearly not seen as being a penalty by Mercon at the time when it was deciding to replace Key Personnel. In those circumstances I do not consider that Mercon has come close to demonstrating that these sums were penalties.