What is the function of a Liquidated Damages clause in a contract?

A Liquidated Damages clause in a contract serves to establish predetermined damages that one party will owe to the other if they fail to meet specific contractual obligations, such as completing a project on time. This clause is particularly important in construction and service contracts, as it helps to quantify the financial impact of delays, providing both parties clarity and a clear expectation of penalties for late performance.

By specifying the amount of damages that will be incurred if the project is not completed within the agreed timeline, this clause avoids the need for lengthy negotiations or court battles over compensation in the event of delays. Such a predefined approach helps protect the interests of the party affected by the delay, ensuring they have a mechanism for recouping some of the losses incurred as a result of the other party's failure to perform as agreed.

In contrast, the other options do not accurately represent the main purpose of a Liquidated Damages clause. Rewarding timely completion pertains more to incentive structures rather than punitive ones, defining project scope relates to outlining the details and boundaries of the work to be performed, and simplifying contract disputes generally addresses processes for resolving issues but does not specifically capture the function of assessing damages for delays.