What are liquidated damages?

Liquidated damages are defined as specific amounts of money that are predetermined and outlined within a contract, which serve as compensation for losses or breaches that may occur due to a party's failure to fulfill their contractual obligations. This concept is utilized to provide clarity and assurance to both parties about the potential financial repercussions of not meeting the terms of the agreement. By establishing a fixed amount for damages, it eliminates the need for lengthy disputes over the value of losses incurred and allows for more efficient resolution in the event of a breach.

In essence, liquidated damages are designed to be a reasonable estimate of potential losses based on the circumstances surrounding the contract and the parties’ expectations. This approach aids in promoting accountability and ensures that parties understand the financial consequences of their actions — or inactions — as stipulated in the contract.