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Liquidated damages refer to a predetermined sum that both parties agree upon at the time of contract formation, to be paid in the event of a breach. This concept is particularly relevant in contracts where actual damages might be difficult to ascertain following a breach. By specifying an amount beforehand, the parties aim to provide clarity and avoid future disputes regarding what constitutes an appropriate remedy in case of a failure to perform.

This predetermined amount serves as a mutual consent figure, reflecting a fair estimation of potential losses that might arise from a breach, thus benefiting both parties by setting clear expectations. In jurisdictions that uphold the enforceability of liquidated damages, these amounts are typically subject to the restraint that they are not deemed punitive or excessive relative to the anticipated harm caused by the breach.

The other statements fail to capture the essence of liquidated damages. They do not need to be stated in law but rather are created through mutual agreement. While the purpose is to compensate rather than punish, there is no provision for judicial adjustment at will, as parties are bound by their agreement unless it is found to be unenforceable due to unconscionability or other legal grounds.