What are liquidated damages in contract law?

Liquidated damages in contract law refer to a predetermined amount that the parties to a contract agree upon as compensation in the event of a specified breach. This concept is designed to provide clarity and predictability around potential losses that might arise from a breach of contract, allowing the parties to avoid lengthy litigation to determine what damages might be owed.

By setting this amount beforehand, the parties acknowledge the risks involved and the difficulty of calculating actual damages at the time of breach. Therefore, if one party fails to fulfill their contractual obligations, the other party can claim the agreed-upon liquidated damages without having to prove the extent of their losses. This approach can streamline the resolution process following a breach.

The other options do not accurately define liquidated damages: legal fees for contract disputes involve different aspects of contract litigation; undisputed payments refer to amounts agreed upon but do not involve breaches; and compensation for emotional damages pertains to tort law rather than contract breaches.