If a contract provides a fixed sum to be paid upon breach, what is this sum called?

• A. Unliquidated damages
• B. Liquidated damages
• C. General damages
• D. Punitive damages

Answer: (B)

Liquidated damages are a fixed amount the contract parties agree will be paid if a breach occurs. This pre-set figure is meant to represent a reasonable forecast of the losses the breach would cause, so disputes about the exact amount later are avoided. It’s different from unliquidated damages, where the amount is determined after the breach through evidence and calculation. It’s not the same as general damages, which cover losses that naturally result from the breach and aren’t fixed by the contract, and it’s not punitive damages, which aim to punish and are rarely used in contract cases. A liquidated damages provision is enforceable when its amount is a reasonable estimate at the time of contracting and not a penalty.