A reasonable estimation of actual damages, agreed to by contracting parties and included in the contract, to be paid in the event of a breach or for negligence?

• A. Compensatory damages
• B. Liquidated damages
• C. Extracontractual damages
• D. Punitive damages

Answer: (B)

Liquidated damages are a pre‑agreed amount specified in a contract to cover losses if a breach or negligence occurs. The idea is to provide certainty by estimating the actual harm at the time the contract is formed, so if a breach happens, the party pays that fixed amount or uses the agreed formula, rather than proving exact damages after the fact. For this to work well, the amount must be a reasonable forecast of potential harm and not look like a penalty; otherwise it may not be enforceable.

Compensatory damages, by contrast, are actual losses the party proves after a breach. Extracontractual damages arise from non-contractual claims, such as torts. Punitive damages are intended to punish particularly egregious conduct and are not pre-set in a contract.