Explanation:

Let’s break it down.

- Penalty: This is when a contract sets a hefty sum for breach—not necessarily tied to actual loss, often as a “punishment.” Courts don’t always enforce penalties; they might reduce the amount.

- Liquidated damages: This is an amount agreed in advance that’s a fair guess at what the loss would really be if someone breaks the contract. Courts like these if the estimate is reasonable.

- Pre-estimated compensation is the key phrase—liquidated damages fit this perfectly. Penalty doesn’t have to be a genuine estimate.

- Option 3: Either (a) or (b) is close, but not quite right. The law makes a clear difference between penalty (punitive, not a real estimate) and liquidated damages (genuine, pre-estimated).

So, the correct answer is:

Option 2: Liquidated damages