What are liquidated damages?

Liquidated damages refer to a predetermined amount of money that parties agree to as compensation for specific breaches of a contract. When a contract is formed, it can include a clause that outlines what the consequences will be if one party fails to fulfill their obligations. This helps to provide clarity and certainty for both parties, as they know in advance what the financial repercussions will be should a breach occur.

This approach is particularly useful in contracts where damages may be difficult to quantify after a breach. The agreed-upon amount serves not just as a way to ensure that a party is compensated for their losses, but also acts as a deterrent to prevent breaches since the consequences are clearly defined.

In contrast, the other options reflect different legal concepts:

• Unspecified damages are not predetermined in a contract, which contradicts the very definition of liquidated damages.

• Settlements outside of court refer to agreements reached by parties to resolve disputes without going through litigation, which does not align with the concept of liquidated damages as they are tied directly to contract terms.

• Punitive damages, on the other hand, are awarded by courts to punish a party for egregious conduct, particularly in tort cases, rather than being determined ahead of time as part of a contractual agreement.