What legal principle governs liquidated damages claims?

The legal principle that governs liquidated damages is that the damages must be a genuine pre-estimate of the likely loss that is to be incurred. For example, Mr. Justice Lopes in Law v Redditch Local Board stated:

	The distinction between penalties and liquidated damages depends on the intention of the parties to be gathered from the whole of the contract. If the intention is to secure performance of the contract by the imposition of a fine or penalty, then the sum specified as a penalty; but if, on the other hand, the intention is to assess the damages for breach of the contract, it is liquidated damages.