What is "liquidated damages" in a contract?

Liquidated damages refer to a predetermined amount that the parties to a contract agree upon in the event of a breach. This concept allows the parties to establish a specified sum that will be payable as damages if one of the parties fails to fulfill their contractual obligations. The purpose of this arrangement is to provide clarity and certainty for both parties regarding potential consequences, eliminating the need for lengthy negotiations or disputes over the extent of damages in case of a breach.

This definition contrasts with other concepts related to contract breaches. For instance, actual damages represent a calculation based on real losses incurred, which may be more complicated and subjective. Provisions for non-payment of debts and penalties for non-compliance serve different functions in contracts and are not synonymous with liquidated damages. In summary, liquidated damages serve as a pre-agreed measure for breach scenarios, facilitating smoother contractual relations and reducing potential legal complications.