Liquidated damages vs penalty are causation

The Hon'ble Supreme Court has held that if the parties regard a sum as reasonable, the Court should not reduce it in its discretion. In addition, there is potential for liquidated damages to continue post termination and for contractors to be exposed to additional unliquidated damages resulting from any delay.

Nonetheless, courts will take into account whether the sum to be forfeited is much greater than the damage caused by the breach. This flows from the basic premise that damages are awarded only to compensate for loss caused.

liquidated damages and penalties in construction contracts

This brings us to some dichotomies worthy of comment. Courts generally examine all the circumstances existing at the time of the making of the contract, including the following: The relationship that the liquidated damages bears to the range of harm that reasonably could be anticipated at the time of the making of the contract The bargaining power of each party Were the parties represented by attorneys?

Understanding liquidated damages

One dilemma in the comparison between common and civil law is the confusion of terminology with regard to liquidated damages. In short, no matter what you call it — a penalty or a pre-determined damage provision — the court will analyze such provisions based upon their impact on the parties, and not necessarily on their designations. He found that a contractor should not be rewarded for its own default, and so liquidated damages were payable until the actual date of commissioning of the building, even if the contract was terminated prior to that. The first is the uncertainty element; whether the harm caused by the breach is difficult to calculate. As already pointed out, under English law only penalties may be reduced to reasonable compensation. If the liquidated damages are disproportionate, they can, however, be declared a penalty. Consequently, the mere inclusion of a liquidated damages clause does not automatically result in the compensation being payable. The judge found that some delay-related losses such as the losses suffered as a consequence of the lower ROCs rate fell outside the liquidated damages provision because the contracts contemplated compensation for such a breach separately from delay damages. See paras 40 and Supra note 6. Oman follows many other Civil Code jurisdictions in currently not making a formal distinction between liquidated damages and penalty clauses.

They are not at liberty to name an extravagant sum having no relation to the breach, for fear of it being construed as a penalty. Fansworth, Contracts The first is the uncertainty element; whether the harm caused by the breach is difficult to calculate.

In civil law jurisdictions, the assumption is that a penalty clause is enforceable, but may be reduced if it reaches a certain level of excessiveness.

Example of liquidated damages and penalty

The project was beset by delays and Prosolia went into insolvency. Nonetheless, courts will take into account whether the sum to be forfeited is much greater than the damage caused by the breach. The judgment was written by Shah J. Traditionally, in civil code countries, no distinction was made between liquidated damages clauses and penalty clauses. In most countries, the courts never evaluate the intent behind the penalty. While that makes sense on its face, this contrasts with the orthodox view of commentators such as Keating on Construction Contracts and Hudson Building and Engineering Contracts , that liquidated damages should not be payable after termination. The latter does not require proof of any real damage. However, promises to pay a stipulated sum in the event of a breach of contract may be valid if they represent a genuine pre-estimate of the actual damages. In a common law jurisdiction, such a clause will not be enforced if it is not reasonable in proportion to the actual or anticipated damage, and if it is designed to penalize the breaching party. If such sum is a genuine pre estimate of loss it is termed liquidated damages, and if it bears no reflection on the loss suffered, it is termed a penalty.

In a common law jurisdiction, such a clause will not be enforced if it is not reasonable in proportion to the actual or anticipated damage, and if it is designed to penalize the breaching party. Indian decisions tend to follow and incorporate the principles laid down in English decisions.

Liquidated damages in construction

If the parties agree upon a liquidated damages provision, the remedy of specific performance is not necessarily waived. Shah and Arun Kumar JJ. See paras 40 and The judge was not persuaded by the defendant's arguments that the sum had not been negotiated; the parties were experienced and sophisticated commercial parties able to assess the commercial implications of the clause in question. As already pointed out, under English law only penalties may be reduced to reasonable compensation. If a term is stated to be a penalty but turns out to be a genuine pre-estimate of loss, it will be treated as liquidated damages. Oman follows many other Civil Code jurisdictions in currently not making a formal distinction between liquidated damages and penalty clauses. Liquidated Damages vs Penalty Clauses in Oman Readers may be aware that, in common law jurisdictions, a liquidated damages clause may be void as a penalty if the amount payable under such a clause does not represent a genuine pre-estimate of the actual damages for breach of contract. Cellulose Acetate Silk Co. Courts are reluctant to enforce penalty clauses and in such cases the sum stipulated is normally reduced. In most countries, the courts never evaluate the intent behind the penalty. Fansworth, Contracts Consequently, contractors should carefully consider the drafting of liquidated damages, compensation, termination and other similar provisions.

Both can be reduced by the court if obviously disproportionate to the actual loss. To inquire into loss is to necessarily require proof of loss.

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Liquidated Damages v. Penalty: Are Causation and Loss Really Required