What are liquidated damages?

Liquidated damages refer to a specific sum of money that is predetermined and stipulated within a contract, which a party agrees to pay if they breach certain terms of that contract. The primary purpose of liquidated damages is to provide a clear and agreed-upon compensation for losses incurred due to delays or failures in performance, thus saving both parties from the difficulty of calculating actual damages after a breach occurs. They serve as a tool for risk management by offering a measure of certainty regarding potential consequences of non-compliance.

In the context of contracts, setting a liquidated damages clause is particularly beneficial in scenarios where actual damages are difficult to quantify. It ensures that both parties understand the risks involved and can account for them accordingly before the contract is finalized. This clarity helps in fostering better contractual relationships and can motivate parties to meet their obligations as agreed.