A pre-agreed sum specified in a contract that one party pays the other if they breach — typically used when actual damages would be hard to calculate.
Liquidated damages are a pre-specified amount that a party agrees to pay if they breach specific provisions of a contract. Rather than fighting over what the actual damages were after a breach, the parties agree in advance on what the breach is worth. Common uses: a contractor who finishes late pays $500/day per day of delay; a party who terminates early pays the remaining contract value.
For a liquidated damages clause to be enforceable, courts generally require two conditions: (1) the actual damages would have been genuinely difficult to calculate when the contract was signed, and (2) the liquidated amount must be a reasonable estimate of actual damages, not a penalty. Clauses that are clearly disproportionate to actual harm may be struck down as unenforceable penalty provisions.
From a drafting perspective, liquidated damages clauses provide certainty — both sides know the consequence of certain breaches before they happen. This can speed resolution of disputes. But they can also eliminate the injured party's ability to recover more than the liquidated amount, even if actual damages are higher. Understanding what you're capping and what you're agreeing to pay in advance is important before including or accepting a liquidated damages clause.