Liquidated damages, on the other hand, are an amount estimated to equal the extent of injury that may occur if the contract is breached. The non-defaulting party may obtain a judgment for the amount of liquidated damages, often based on a stipulation (clear statement) contained in the contract, unless the party who has breached the contract can make a strong showing that the amount of liquidated damages was so "unconscionable" (far too high under the circumstances) that it appears there was fraud, misunderstanding or basic unfairness. By this term is understood the fixed amount which a party to an agreement promises to pay to the other, in case he shall not fulfill some primary or principal engagement into which he has entered by the same agreement it differs from a penalty. When the damages are uncertain, and not capable of being ascertained by any satisfactory or known rule; whether the uncertainty lies in the nature of the subject itself, or in the particular circumstances of the case.
These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.
One of the principle requirements of a liquidated damages clause is that it does not venture into the realm of a penalty – which would make that clause void and unenforceable. When dealing with contracts that contain liquidated damages clauses, it is important you consider the following: Are the damages a genuine, pre-agreed estimate (liquidated damages)? In Ringrow , the High Court reiterated the law separating penalties from liquidated damages.
Facts BP sought to exercise an option to buy back a BP service station independently owned by Ringrow – following a discovery that Ringrow breached the contract by selling non-BP fuel.
Here, the liquidated damages was said to be BP’s ability to exercise the option.
Ringrow however, argued that this buyback provision was a penalty as it had exceeded a genuine, pre-agreed estimate of the damage suffered as a result of Ringrow’s breach.
But depending on how a liquidated damages clause is written, it can potentially be challenged in court.
In Case of Contract Breach A liquidated damages clause sets an amount in a contract in the event of a breach.
Liquidated damages clauses are common in real estate contracts.
Present in certain legal contracts, this provision allows for the payment of a specified sum should one of the parties be in breach of contract.
This is meant as a fair representation of losses in situations where actual damages are difficult to ascertain.
These liquidated damages are meant to be fair rather than punitive.
Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract.