In a contract, the stipulation is generally made that a certain sum per day shall be paid the owner as liquidated damages, for every day the contract remained unfinished beyond the stipulated time. Whether the condition can be enforced by the courts, depends always on whether the payment is to be made as a penalty, or as liquidated damages. If the court finds that the payment is in the nature of a penalty the condition cannot be enforced, for the penalizing or punishing of a person by penalty, is the prerogative of the state through the courts. If, on the other hand, the condition is construed to be in the nature of liquidated damages, that is, the mutual understanding of the contracting parties, as to the exact loss that will result from a failure to complete the work at the stipulated time, the condition will hold good and be enforced by the courts. Even though the courts hold that the condition imposes a penalty, it does not relieve the contractor for he is still liable for damages for the delay caused. The only difference is, that in case the condition is held to be a penalty, it throws the question open for the jury to determine just what the loss or damage was that was sustained by the owner. Of course, if the amount of liquidated damages as stipulated in the contract were low and reasonable, the contractor might fare worse by having it construed as a penalty, than if he allowed it to stand as liquidated damages, for a jury might find that the real loss to the owner exceeded the amount of the liquidated damages stipulated.

In order to avoid uncertainty as to the intention of the parties, and make sure that the amount stipulated shall be construed as liquidated damages, not as a penalty, the contract is often drawn with a stipulation providing for premiums and liquidated damages. That is, the contract stipulates that for every day the work on the contract is completed before a certain time, the contractor shall receive from the owner, as premium, a certain sum per day; and, conversely, for every day exceeding that time that the work remains unfinished, he shall pay to the owner, an equal sum as liquidated damages. Such an agreement is generally enforceable as drawn.