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What are "Liquidated Damages" in a Written Contract?

Liquidated damages (also known as ascertained damages) are a specific amount of damages the parties to a contract designate during the formation of the contract for the injured party to collect as compensation in event of a breach.  When damages are not predetermined in advance, then the amount recoverable is said to be "at large" or "unliquidated" (i.e. to be determined by a court in the event of breach).

If the parties agree on a liquidated amount, the contract must contain a specific liquidated damages provision clearly outlining the amount of damages if one party fails to fuflill its obligations under the contract. 

In order for a liquidated damages clause to be enforceable, there are two general  conditions that must be met. First, at the time the contract is executed, damages must be sufficiently uncertain so that the liquidated damages clause will likely save both parties the future difficulty of estimating damages.  Second, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the provision.  The agreed upon damages must not in nature be a penalty to the breaching party that is greatly disproportionate to the injury which might result. 

For example, suppose a building owner agrees to lease retail space to the owner of a new clothing boutique.  If the lessor breaches the contract by refusing to lease the storefront at the specified time, it will be difficult to determine what profits the clothing boutique will have lost because the success of a newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for the store owner to insist upon a liquidated damages clause in case the lessor fails to perform.