What are "liquidated damages"?

Liquidated damages refer to a specific amount of money that is agreed upon by the parties to a contract, which will be paid as compensation in the event of a breach of that contract. This predetermined amount serves as a way to provide certainty and clarity for both parties, as they know in advance what the financial consequences will be if one of them fails to uphold their obligations.

In Texas, liquidated damages must be reasonable and reflect a genuine attempt to estimate the actual damages that could be incurred if the agreement is breached. They are distinct from penalties, which are not enforceable under Texas law. The inclusion of liquidated damages in a contract often helps to avoid lengthy disputes over the amount of damages owed, as the parties have already set this amount when drafting the agreement.

The other options describe different concepts. Compensatory damages awarded by a court (implied in the first choice) arise from actual losses incurred and are determined through litigation, while mutual agreements can lead to damages but do not define the specific concept of liquidated damages. Uncertain damages based on actual loss suggest a lack of clarity and an inability to measure losses effectively, which is contrary to the essence of liquidated damages, which aim to provide certainty.