What are liquidated damages?

Liquidated damages refer specifically to the pre-determined monetary compensation that is outlined in a contract, which a party agrees to pay if they breach the contract. This financial stipulation serves several purposes, primarily as a means of establishing a clear remedy in the event of non-compliance with the contract terms.

The concept behind liquidated damages is to create certainty regarding the financial consequences of a breach, which can help avoid disputes over the amount of damages should a breach occur. The amount is typically agreed upon by both parties at the time the contract is created, based on a reasonable estimate of the anticipated damages resulting from a breach. This is important because it provides a clearer path for enforcement and resolution without the need to prove actual damages, which can often be complicated and time-consuming.

In contrast, non-monetary penalties are not recognized in most contract law as being enforceable. Additionally, monetary refunds for overpaid services do not fit within the framework of liquidated damages, as they pertain to differential issues of payment rather than breach consequences. Lastly, costs associated with contract negotiations refer to expenditures incurred in the process of creating a contract, which are unrelated to the implications of breaching the contract itself.

Liquidated damages thus serve a crucial role in contract management