Liquidated damage
‘Liquidated damage’ (sometimes
also called ‘liquidated and ascertained damage’) is the amount that two
entities entering into a contract mutually agree upon and designate as payable
in the form of compensation to the injured party by the afflicting party, in
the event of some damage or loss occurring to the injured party (examples of
which could be delayed performance or an unacceptable quality of deliverable).
Purpose of assigning ‘liquidated damage’
Having a ‘liquidated damage’
clause in an agreement is particularly useful if the financial implication
arising out of the future damage cannot be accurately ascertained in advance.
Having a ‘liquidated damage’ clause in such instances can then help avoid the
hassle of estimating damage, if such an event to actually occur in the future.
Conditions when ‘liquidated damage’ clause can be enforced
More specifically, for a
‘liquidated damage’ clause in an agreement to be upheld and become enforceable,
a few conditions have to be necessarily met.
Firstly, at the time when this
clause is invoked, the amount designated as liquidated damage should
approximately be the same as the actual loss that is incurred by the injured
party. This is because the law provides for equitable justice, and any
‘liquidated damage’ clause in an agreement cannot tantamount to unjustifiable
benefit and enrichment of any party.
Secondly, as mentioned above, if
the loss that is likely to occur from a potentially damaging future scenario is
fairly uncertain at the time of entering into the contract, having a
‘liquidated damage’ clause will help both parties avoid undertaking an
elaborate impact assessment and financial implication of such an event, were it
to actually occur.
However, if the financial loss
even at the time of actual damage cannot be fairly ascertained, then it is
subject to contingency and is instead referred to as un-liquidated damage.
Difference between ‘liquidated damage’ and ‘penalty’ clause
As stated earlier, ‘liquidated
damage’ cannot be awarded to the injured party, if it is likely to benefit from
its enforcement more than the loss that has been incurred in financial terms.
If that were done, then the purpose of this payout will not be to compensate
for the loss incurred by injured party but rather to punish the afflicting
party for a breach of the agreed terms in the contract. This however falls
under the purview of the ‘penalty’ clause and not the ‘liquidated damage’
clause, in legal terms.
Exceptions when ‘liquidated damage’ cannot be awarded
Apart from the above case, when
awarding ‘liquidated damage’ will tantamount to unjustified financial gain for
the injured party or severely penalize the afflicting party, this clause is
further not enforceable under the ‘Doctrine of Concurrent Delay’ – that is, when the clause of delay or loss can
be attributed to the acts of both the contracting parties.
Industries where a ‘liquidated damage’ clause is commonly applied
Two industries where the
‘liquidated damage’ clause is most commonly applied is the financial services
industry and the construction industry.
Keywords- Liquidated damage, clause, loss, party
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