Contracts
Liquidated damages
An amount the parties agree in advance will settle a breach
Commonly the earnest money, forfeited to the seller if the buyer defaults. Agreeing the figure up front avoids a later argument about actual loss, and courts uphold it where it is a reasonable pre-estimate of harm.
How the exam asks about it
A sum set high enough to punish rather than compensate risks being struck down as a penalty. That distinction — compensation against punishment — is what the exam is testing.
Related terms
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