What are "liquidated damages" in a contract?

Liquidated damages refer to a specific amount of money that is predetermined and agreed upon by both parties within a contract. This amount is established in the event of a breach of contract, providing a clear and measurable remedy. The purpose of liquidated damages is to provide certainty and avoid disputes over the actual damages suffered due to a breach. By specifying these damages in advance, the parties can save time and resources that might otherwise be spent in litigation to prove actual losses.

In contrast, random penalties for poor performance do not carry the legal weight or precision that liquidated damages entail. Additional payments for services rendered do not pertain at all to breaches or penalties; they relate to the completion of contractual obligations, rather than consequences of failing to meet those obligations. Legal fees associated with contract disputes refer to the costs that may arise if a dispute leads to litigation, which are separate from the damages suffered as a result of a breach. Overall, the definition and purpose of liquidated damages focus specifically on pre-determined financial remedies for contract breaches.