liquidated damages & contract law legal advice - london lawyers explain liquidated damages
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8/10/2019 Liquidated Damages & Contract Law Legal Advice - London Lawyers Explain Liquidated Damages
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Legal Dictionary
Liquidated damages is a term used in contract law to indicate that damages have been agreed and fixed by
the parties, whereby the sum of damages to be paid in the event of a type of breach of contract is specified in
the contract; different sums may be fixed by the reference to specific breaches of contract. In appropriate
cases, the innocent party may look to apply for an injunction to restrain breaches of contract, or specific
performance of the contract to require the other party to perform the contract, where the availability of an
injunction remains.
When the parties fix the sum of damages which are payable for breaches of contract, assessment of the loss
suffered is dispensed with, avoiding potentially protracted disputes and argument in respect to the loss
actually suffered by the innocent party, as the parties know how much is to be paid in the event of the
specified breach.
Liquidated Damages Clauses and EnforceabilityIn order to be enforceable, the sum of liquidated damages must be no more than a genuine pre-estimate of
the loss expected to be suffered in the event of the breach. If it is not, the sum is considered a penalty and
unenforceable.
A sum fixed is likely to be a penalty if it is not commercially justifiable in the context of the contract. If the
sum is excessive having regard for what the assessed damages would be for the breach, it will not be a
genuine pre-estimate of loss and be unenforceable;
1.
Whether the sum is a penalty or not is assessed at the time of making the contract, not at the time of
the breach. All of the terms of the contract, and circumstances of the case are relevant to the
assessment;
2.
Fixed sums set out in contract are likely to be penalties where:
The sum is well above the greatest sum which could have been suffered in the event of the breach
in question;
a.
The sum is greater than the sum which must be paid under the contract. For instance, where a
person is required to pay 10 by a fixed date, the liquidated damages clause provides that 15
must be paid;
b.
Where a single lump sum is payable in the event of a number of events, some of which are likely tocause minimal loss or damage.
c.
3.
Simply because a fixed sum is referred to as a ' penalty' in a contract does not necessarily make it so. Courts
will consider the terms of the substance of the provision rather than what it is called in the contract.
Liquidated damages may be agreed by the parties to a contract for almost any sort of breach of contract,
whether it is for non-performance of a term, or defective performance of a term of the contract.
Multiple Breaches of Contract
In the event that a liquidated damages clause is not enforceable, and is considered a penalty, the innocent
party is entitled to recover the actual loss, which is assessed by the Court. In the case where there is more
than one breach of contract, one or more of which do not fall into a breach event provided for in the contract,
the claimant is entitled to sue for its loss calculated pursuant to liquidated damages clauses and for
unliquidated damages for the balance of the breaches of contract.
Contracts for Sale of Goods
Accordingly, in a sale of goods contract where deliveries of the goods are late, liquidated damages may be
made payable to the supplier, or in a contract for services liquidated damages may be made payable where
liquidated damages Contracts / Terms of Contracts / Damages15 June 2013; Updated: 11 July 2013
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the services are late or defective. The latter finds form in commercial IT contracts as service level
compensation.
For example, a contract may provide that where supplier does not deliver all of the goods ordered, a sum of
liquidated sum of 10 per product is payable to the buyer. Where the goods are defective a different sum of
15 could be made payable to the buyer. In this way, specific breaches of contract are provided for. Where a
breach takes place, the buyer would be left to sue for unliquidated damages. which would be assessed by a
Court and subject to the rules regulating remoteness of damage.
Usage: The contract specified that liquidated damages would apply in the event of late delivery of professional services.
Related Terms
general damages ; special damages ; penalty clause; mitigation of loss ; breach of c ontract ; quantum meruit; remoteness of
damage; contracts ; assessment of damages; financial loss.
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