Liquidated Damages

Usually in contracts, the parties may agree upon a definite sum of money that has to be paid upon breach of any specific condition laid down in that contract.  Such damages are termed liquidated damages.  The common law does not enforce liquidated damages clauses intended to punish the breaching party rather than to compensate the injured party.

In order to enforce a liquidated damages clause, the amount contracted upon should approximate the damages likely to fall upon the party seeking the benefit of the term.  While entering into the contract, both parties must not be certain about the damages and the liquidated damages clause should be intended to save both parties from estimating damages in the future.

Uncertain damages are called unliquidated damages and are not calculable prior to the occurrence of the loss.  Sometimes, courts may refuse the enforcement of liquidated damages provisions in construction contracts and may choose to follow the Doctrine of Concurrent Delay if the delay of a business project was caused by the actions of both the parties.

Sometimes the liquidated damages are the amount of a deposit or a down payment, or based on a formula, such as a percentage of the contract amount.  Liquidated damages clauses will generally be enforced as long as the amount is not unconscionable.

Courts are of the opinion that a liquidated damages clause could be upheld unless the sum grossly exceeds the probable damages on breach, or the same sum is made payable for any variety of different breaches.  Liquidated damages clause may be quashed if a mere delay in payment has been listed among the events of default.

Interest is allowed as a matter of right in damages for the detention of money if –

  • payment has been wrongfully or vexatiously withheld.
  • money belonging to another person is not paid over at the proper time.
  • a person fails to apply money promptly in accordance with his or her duty.
  • money is used by a person wrongfully to his or her own profit.

Inside Liquidated Damages