What are liquidated damages in a contract?

Liquidated damages are a specific provision included in contracts that outlines predetermined amounts to be paid by one party if they fail to fulfill their contractual obligations, particularly in relation to performance or delays. This mechanism serves to establish a clear expectation for both parties about the consequences of non-compliance, allowing for more effective risk management.

The concept of liquidated damages is designed to provide a genuine estimate of the loss anticipated by non-compliance, rather than being punitive in nature. By agreeing to these terms upfront, both parties can avoid the uncertainty and potential disputes that could arise from trying to determine actual damages after a breach occurs.

In contrast, available options that refer to poor performance unrelated to delays, monetary benefits for compliance, or penalties assigned during negotiations do not capture the essence of liquidated damages, which specifically focus on a predetermined, agreed-upon consequence for failing to meet contractual terms.