Editing Contracts/Liquidated damages

{{:Contracts/TOC}}{{Breadcrumb|parent_page=Contracts|alias={{SUBPAGENAME}}}}
'''Liquidated damages''' (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a [[contracts|contract]]<ref name= Liquidated>{{Cite web |  url = http://legal-dictionary.thefreedictionary.com/Liquidated+damages | title = Liquidated Damages  | format = w | accessdate = 2012-12-18 }}</ref> for the injured party to collect as compensation upon a specific breach (e.g., late performance).<ref name= "Liquidated" />

When [[damages]] are not pre-determined/assessed in advance, then the amount recoverable is said to be 'at large' (to be agreed or determined by a court or tribunal in the event of breach).

==Common law==

Generally, at common law, a liquidated damages clause will not be enforced if its purpose is to punish the party in breach rather than to compensate the injured party<ref>{{cite BAILII |court=UKHL |year=1914 |num=1 |litigants=Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd |parallelcite=[1915] [[Appeal Cases Law Reports|AC]] 79}}.</ref><ref name="Amev-Udc">{{cite AustLII|HCA|63|1986|litigants=Amev-Udc Finance Ltd v Austin |parallelcite=(1986) 162 [[Commonwealth Law Reports|CLR]] 170 |courtname=auto |date=}}.</ref><ref name="Plessnig ">{{cite AustLII|HCA|7|1989|litigants=Esanda Finance Corp v Plessnig  |parallelcite=(1989) 166 [[Commonwealth Law Reports|CLR]] 131 |courtname=auto |date=}}.</ref> (in which case it is referred to as a [[Contracts/Punitive damages|punitive or penalty clause]]).<ref name= "Liquidated damages, penalties and the Just Compensation rule: Some notes on an enforcement model and a theory of efficient breach" >{{Cite journal | title = Liquidated damages, penalties and the Just Compensation rule: Some notes on an enforcement model and a theory of efficient breach | journal = Columbia Law Review  | volume = 77 | issue = 4  | pages = 554–594  |jstor = 1121823|last1 = Goetz|first1 = Charles J.| last2 = Scott  | first2 = Robert E.  | year = 1977  | doi = 10.2307/1121823  }}</ref> One reason for this is that the enforcement of the term would, in effect, require an equitable order of [[specific performance]]. However, courts sitting in [[Equity (law)|equity]] will seek to achieve a fair result and will not enforce a term that will lead to the [[unjust enrichment]] of the enforcing party.<ref>{{Citation |  url = http://law.jrank.org/pages/8310/Liquidated-Damages.html | title = Liquidated Damages  | journal = American Law Encyclopedia  | volume = 6  | format = w  | accessdate = 2009-04-07 }}</ref>

In order for a liquidated damages clause to be upheld, two conditions must be met. 
* First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term.<ref name= "Liquidated damages, penalties and the Just Compensation rule: Some notes on an enforcement model and a theory of efficient breach" />
* Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.
Damages that are sufficiently uncertain may be referred to as '''unliquidated damages''', and may be so categorized because they are not mathematically calculable or are subject to a [[contingent liability|contingency]] which makes the amount of damages uncertain.

Contracts under common law require there to have been some attempt to create an equal or reasonably proportionate quota between the damages made and the actual loss. Parties must not lose sight of the principal compensation and they must keep the time of execution and the difficulty of the calculations in mind when drafting the contract. <ref>https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2278&context=flr#page=7</ref> <ref>https://www.law.com/newyorklawjournal/almID/1202713659926/Defining-the-Limits-of-Liquidated-Damages-Clauses/</ref>

===Example===
For example, suppose Neal Townsend agrees to lease a store-front to Richard Smith, from which Richard intends to sell jewellery. If Townsend breaches the contract by refusing to lease the store-front at the appointed time, it will be difficult to determine what profits Smith will have lost because the success of newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for Smith to insist upon a liquidated damages clause in case Townsend fails to perform.

In the case of construction contracts, courts have occasionally refused to enforce liquidated damages provisions, choosing to follow the [[doctrine of concurrent delay]] when both parties have contributed to the overall delay of the project.

Contracts in the [[NEC Engineering and Construction Contract|NEC3]] family use the term 'low service damages' (optional clause X.17) and generally include a Low Service Damages Schedule.<ref>[[Institute of Workplace and Facilities Management|British Institute of Facilities Management]], Getting Started with the NEC3 Term Services Contract, accessed 23 June 2015</ref>

==Uniform Commercial Code==

In the United States, Section 2-718(1) of the [[Uniform Commercial Code]] provides that, in contracts for the sale of goods:<ref>{{cite web|title=§ 2-718. Liquidation or Limitation of Damages; Deposits.|url=https://www.law.cornell.edu/ucc/2/2-718|publisher=Legal Information Institute|accessdate=17 March 2015|date=2012-11-20}}</ref>

:Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

This largely mirrors the common law rule, which applies to other types of contracts under the law of most US states.

==Other legal systems==

===Civil law===

[[Civil law (legal system)|Civil law]] systems generally impose less severe restrictions on liquidated damages. For example, Article 1226 of the [[French Civil Code]] provides for ''clause pénale'', a variant of liquidated damages which combines compensatory and coercive elements. Judges may adjust excessive contract penalties, but such clauses are not generally void as a matter of French law.<ref>{{cite web|last1=Clarke|first1=Joanne|title="Clause pénale" v. liquidated damages – any similarities?|url=http://kluwerconstructionblog.com/2010/02/24/%E2%80%9Cclause-penale%E2%80%9D-v-liquidated-damages-any-similarities/|website=Kluwer Construction Blog|accessdate=17 March 2015|url-status=dead|archiveurl=https://web.archive.org/web/20150402121351/http://kluwerconstructionblog.com/2010/02/24/%E2%80%9Cclause-penale%E2%80%9D-v-liquidated-damages-any-similarities/|archivedate=2 April 2015}}</ref>

# The parties may agree on the amount of the liquidated damages with respect to the failure to perform the obligation. In such case, the court may not increase or decrease the amount thereof.
# The liquidated damages shall not preclude the demand for performance or the exercise of the cancellation right.
# Any penalty is presumed to constitute liquidated damages.

In the U.S. state of [[Louisiana]], which follows a civil law system, liquidated damages are referred to as "stipulated damages".<ref>[[Louisiana Civil Code]], Article 2005: Parties may stipulate the damages to be recovered in case of nonperformance, defective performance, or delay in performance of an obligation. http://legis.la.gov/Legis/LawSearchList.aspx accessed 23 June 2015</ref> Prior to 1 January 1985, Louisiana law used the term “penal clause” under former article 2117 of the [[Louisiana Civil Code|Civil Code]].<ref>Louisiana Court of Appeal, Second Circuit, Mary Mobley v. Gary Mobley, No. 37,364-CA {{cite web |url=http://www.lex.uniba.it/ta/clausola%20penale%20louisiana%20court%20of%20appeal.pdf |title=Archived copy |accessdate=2015-06-23 |url-status=dead |archiveurl=https://web.archive.org/web/20150623073715/http://www.lex.uniba.it/ta/clausola%20penale%20louisiana%20court%20of%20appeal.pdf |archivedate=2015-06-23 }}</ref> Stipulated damages create a secondary obligation for the purpose of enforcing the principal obligation. The aggrieved party may demand either the stipulated damages or performance of the principal obligation, but may not demand both except for delay.<ref>Louisiana Civil Code, Article 2007 http://legis.la.gov/Legis/Law.aspx?d=109263 accessed 23 June 2015</ref> Stipulated damages may not be modified by the court (and will therefore be enforced) "unless they are so manifestly unreasonable as to be contrary to public policy".<ref>Louisiana Civil Code, Article 2012 http://legis.la.gov/Legis/Law.aspx?d=109269 accessed 23 June 2015. See also {{cite web|last1=Isom|first1=H. Chervis|title=Specific Performance: The Importance of a Clear Liquidated Damage Provision|url=http://www.bakerdonelson.com/specific-performance-the-importance-of-a-clear-liquidated-damage-provision-01-03-2007/|publisher=Baker Donelson|accessdate=17 March 2015}}</ref>

==References==
{{reflist}}