Court Reporter Practice Exam

What are "liquidated damages"?

1. Penalties for non-compliance

2. Damages determined by a court

3. Damages that are agreed upon by parties

4. Compensation for emotional distress

The correct answer is: Damages that are agreed upon by parties

Liquidated damages refer to a specific amount of money that the parties involved in a contract agree upon in advance, to be paid if one party fails to fulfill their obligations under the contract. This concept serves to provide a clear, pre-determined remedy in the event of breach, simplifying the process of seeking compensation and reducing the need for lengthy litigation to prove actual damages. The essence of liquidated damages lies in their agreed-upon nature, setting them apart from penalties or other forms of compensation. This pre-agreement is crucial as it reflects the intent of the parties at the time the contract was formed. In contrast, penalties for non-compliance are generally viewed unfavorably by courts as they are meant to punish rather than compensate, while damages determined by a court occur post-breach and are not predetermined. Compensation for emotional distress, while a valid legal concept, does not fit within the context of liquidated damages, which specifically relate to financial consequences of contract breaches.