What are liquidated damages in a contract?

Liquidated damages in a contract refer specifically to a predetermined amount of money that is agreed upon by both parties to be paid in the event of a breach of contract. This type of provision is included to provide certainty and clarity regarding compensation should a specific breach occur. By defining the amount in advance, both parties know their potential liabilities and can avoid lengthy disputes in the event of a breach.

In many cases, liquidated damages are established when estimating the actual damages may be difficult or impractical. This pre-agreement on harm helps streamline the process and can encourage compliance with the terms of the contract. Thus, liquidated damages serve as both a deterrent against breach and a straightforward means of compensation if one occurs.