What type of damages are referred to as liquidated damages?

Liquidated damages are specifically defined as damages that are predetermined and agreed upon by the parties involved in a contract. This concept is crucial in contract law, as it provides a clear and certain remedy in the event of a breach. By agreeing to a specific amount of damages within the contract, both parties are aware of the consequences of not fulfilling their contractual obligations, which helps to prevent disputes over loss amounts later on.

The purpose of liquidated damages is to streamline the resolution process when a breach occurs, allowing the parties to avoid lengthy litigation regarding the actual damages incurred. This contrasts with other types of damages, which might not have specific amounts set in advance or may vary based on the circumstances surrounding a breach. For instance, damages established by law may not take into account the unique terms of the contract, and those arising from negligence are typically assessed based on the extent of loss rather than a pre-agreed figure. Additionally, damages that are difficult to measure also do not meet the criteria for liquidated damages since the defining characteristic is the clarity of the amount set forth in the agreement.