A liquidated damages clause fixes in advance what a party pays on breach. It is useful where actual loss would be genuinely hard to prove, and it is one of the more frequently struck provisions in commercial contracts.
Enforceability generally turns on two questions: whether the anticipated harm was difficult to estimate at the time of contracting, and whether the sum is a reasonable forecast of that harm. A figure bearing no relation to any plausible loss is treated as a penalty and is unenforceable — courts will not enforce a provision whose purpose is to compel performance through fear rather than to compensate.
Drafting points that matter: state the reason the harm is difficult to estimate, scale the figure to the seriousness of the breach rather than applying one number to every default, and avoid a clause that also preserves the right to actual damages for the same breach, which suggests the figure was never an estimate.
For the party facing one: check whether the actual loss is provable and modest. That comparison is usually the strongest argument that the clause is a penalty.