What are liquidated damages?

Liquidated damages refer to predetermined compensation that is outlined in a contract to be paid in the event of a breach. This type of damage is agreed upon by both parties at the time the contract is formed and serves as a means to quantify the losses that one party may incur due to the other party's failure to fulfill their contractual obligations.

The purpose of liquidated damages is to provide a clear understanding of the financial consequences of non-compliance, helping to avoid disputes over the amount of damages in the event of a breach. This contractual term allows for a swift resolution without the need for complex calculations or litigation over actual damages, which may be difficult to prove and calculate accurately.

In contrast, amounts due for late payments represent penalties or fees related to specific instances of overdue payments rather than a generalized compensatory mechanism agreed upon in advance. Assets liquidated for cash involves converting physical assets into liquid funds, which does not pertain to contractual agreements. Lastly, funds set aside for future projects involve budgeting and financial planning rather than addressing contractual breaches.