What do the terms "liquidated damages" refer to in a contract?

The term "liquidated damages" specifically refers to a predetermined amount of money that parties agree upon in a contract to be paid if one party breaches the contract. This concept ensures that the parties have clarity and mutual understanding regarding the consequences of a breach, which can help avoid disputes over how damages should be calculated after a breach occurs. By establishing these damages ahead of time, it provides a measure of certainty for both parties as they enter into the agreement.

In a well-drafted contract, the liquidated damages clause specifies the amount, making it easier for the injured party to claim compensation without the need for lengthy litigation to prove actual damages. This is particularly useful in situations where actual damages might be difficult to ascertain or quantify.

Understanding liquidated damages as a predetermined form of compensation clarifies that such damages are not penalties; they are instead a reflection of the parties' mutual agreement about potential losses from a breach, which emphasizes their enforceability under contract law.