What are damages called that are established by a contract to be paid if there is a default?

Liquidated damages are specified amounts that parties agree upon in a contract to be paid in the event of a default or breach of that contract. This type of damage is predetermined and is often included to provide certainty and clarity for both parties, eliminating the ambiguity that can arise from calculating damages after a breach occurs. By defining an amount upfront, the parties can avoid disputes over what constitutes a fair compensation.

This mechanism is particularly useful in contracts where estimating actual damages might be challenging or impractical. Liquidated damages encourage parties to adhere to the terms of the agreement, understanding the financial implications of non-compliance. Thus, when a party defaults, the specified liquidated damages become enforceable as agreed upon in the contract.

In contrast, actual damages refer to the real losses incurred, punitive damages are aimed at punishing wrongdoing and deterring future misconduct, and consequential damages involve losses that are indirect and not the direct result of the breach. These terms represent different legal concepts and contexts in which damages can be assessed, but they do not carry the same predetermination feature as liquidated damages.