What is a liquidated damages clause primarily used for?

A liquidated damages clause is primarily used to outline the amount of damages that a party will owe in the event of a breach of contract. This clause provides a pre-determined sum that is agreed upon by both parties at the time of entering into the contract. The intention behind including such a clause is to offer a sense of certainty and to help avoid disputes over the amount of damages that may be incurred if one party fails to perform as promised.

By specifying the expected damages, the parties can understand the potential financial consequences of a breach, which may also serve as a deterrent against non-performance. This means that when a breach occurs, the non-breaching party has clarity on the compensation they are entitled to, streamlining the process of seeking redress.

This focus on pre-determined amounts distinguishes liquidated damages clauses from other elements of contract law, such as negotiations, modifications, or dispute resolution methods. While those aspects are important in the overall framework of contract law, they do not directly address the purpose of outlining specific damages associated with a breach.