What are liquidated damages?

Liquidated damages are a specific type of damages that parties to a contract agree upon in advance. These are typically included in the terms of a contract to provide a clear and predetermined amount of compensation in the event of a breach. The key characteristic of liquidated damages is that they are intended to be a reasonable estimate of the expected harm that would result from the breach, rather than a penalty. This pre-establishment of damages serves to provide both parties with certainty and clarity regarding the financial implications of a breach.

In contrast, damages determined by a judge may not necessarily reflect the agreed-upon terms within the contract and can involve various calculations of actual damages incurred. Similarly, damages requiring evidence of loss pertain to the requirement to prove specific losses that have occurred, which is not the case with liquidated damages. Lastly, unpredictable losses after a breach refer to damages that are not pre-estimated and often require a more complex legal analysis to establish, differing fundamentally from the predictable nature of liquidated damages.

Thus, the understanding that liquidated damages are those that are mutually agreed upon and deemed reasonable highlights their intended purpose in promoting fairness and predictability in contractual agreements.