Which of the following statements is NOT correct regarding liquidated damages for breach of contract?

Liquidated damages serve a specific purpose in contract law, particularly in situations where actual damages are difficult to quantify at the time the contract is made. A critical aspect of liquidated damages is that they are intended to provide a fair estimate of damages resulting from a breach, rather than serve as a punishment.

The statement that "penalty" is another word for liquidated damages and they are treated the same under contract law is not correct because the two concepts are fundamentally different. Liquidated damages must represent a reasonable forecast of a party's potential damages resulting from a breach and are enforceable as long as they meet certain legal standards. On the other hand, penalties are designed to punish the breaching party and are typically not enforceable in court. Courts often refuse to enforce penalty clauses as they are viewed as contrary to public policy, which emphasizes that the purpose of damages is to compensate for loss, not to punish the wrongdoer.

The other statements accurately reflect the nature of liquidated damages. They must indeed be agreed upon at the time of contracting, be based on a reasonable estimate of damages, and are frequently included in contracts such as construction contracts to ensure timely completion and compliance.