What are "liquidated damages" in a contract?

Liquidated damages refer to specific amounts that are predetermined and explicitly stated in a contract as compensation for a breach. The purpose of including liquidated damages in a contract is to provide clarity and certainty for both parties regarding what the financial consequences of a breach will be. This arrangement helps avoid disputes over damages that may arise if one party fails to fulfill its obligations, as the parties have agreed in advance on the amount that should be paid if a breach occurs.

In this context, option B correctly defines liquidated damages. They are typically used in contracts where it may be difficult to quantify actual damages in the event of a breach, providing a fair and agreed-upon remedy in such situations.