Damages in contract law play a crucial role in compensating parties for losses resulting from breaches of contractual obligations. Liquidated damages clauses promote commercial certainty and party autonomy. Section 74 of the Indian Contract Act, 1872 codifies the law on liquidated damages. Over the years, courts have employed several evaluative criteria and interpretative tools when deciding upon the validity, scope and essential aspects of liquidated damages clauses. This paper analyses the principles governing liquidated damages and attempts to use this analysis to provide a guide in drafting a valid and legally enforceable liquidated damages clause.