What are liquidated damages?

Liquidated damages refer to a predetermined amount that parties to a contract agree upon at the time the contract is executed, specifically to be paid in the event of a breach. This concept is often used to provide clarity and avoid disputes regarding how much compensation should be owed for a failure to perform under the terms of the contract.

The key aspect of liquidated damages is that they must be reasonable in relation to the anticipated harm caused by a breach and cannot be punitive in nature. By agreeing to a specific dollar amount, the parties have established a clear and enforceable expectation for compensation, which can simplify the resolution of contract disputes.

In contrast, options that discuss compensation determined after a breach or damages decided by a court involve different legal principles. Those types of damages may not have been predetermined and are typically established through legal proceedings based on the actual harm experienced, rather than through prior agreement.