What is a characteristic of liquidated damages?

Liquidated damages are a pre-agreed amount that parties to a contract decide upon in case of a breach, and they must genuinely attempt to estimate the damages that may occur due to that breach. For liquidated damages to be enforceable, they need to reflect a reasonable forecast of just compensation for the harm caused by the breach rather than serve merely as a punitive measure.

This characteristic underscores the purpose of liquidated damages: to provide clarity and predictability for both parties regarding potential financial consequences of non-performance. Courts generally assess the reasonableness of the estimate at the time of contract formation, ensuring it is not punitive but rather compensatory. If the amount stipulated is excessively high or falls outside of what would realistically constitute a genuine attempt to estimate damages, it may be deemed unenforceable.

The other statements do not align with the nature of liquidated damages. While liquidated damages can be enforced, they do not universally represent a penalty clause, are not generally excessive or arbitrary, and their enforceability can depend on specific circumstances surrounding the breach.