What are liquidated damages in a contract?

Liquidated damages are pre-determined amounts specified within a contract that are payable when one party breaches the agreement. This means that upon signing the contract, both parties agree on a specific sum that will be paid as damages if a breach occurs, thereby providing a clear framework for compensation instead of leaving it to interpretation or requiring calculation of actual damages later.

This concept is particularly useful for two main reasons: it provides certainty and stability for both parties by establishing the consequences of a breach in advance and it can help to avoid lengthy legal disputes over the amount of damages that may be incurred as a result of a breach. The goal is to set a fair and reasonable estimate of potential damages that could result from a breach, rather than imposing punitive damages that could be seen as excessive or punitive.

In contrast, the other options suggest scenarios that do not accurately define liquidated damages, either by implying additional payments, exceeding actual damages, or relating to property sales, which do not align with the fundamental principle of this legal concept.