Liquidated Damages

The common law description for a clause in a contract that specifies the amounts of damages that a party must pay for breaches of contract.  Liquidated damages in principle avid the need for a party to quantify its damages. However, it is a strong principle in common law that liquidated damages must be a “a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach [of contract]” and may not be designed simply be a penalty for breach of contract.  Thus to take for example a late delivery provision, a clause that calculates the liquidated damages on a daily basis will usually be considered fair if the amounts are not excessive, while a provision that states a large fixed amount to be paid in toto for any delay no matter how short may be considered a penalty.

Liquidated damages can be general or specific. General damages apply to all heads of damages that may arise under a contract, whereas specific damages would apply to a particular head of damages, such as for example late delivery.  Typically specific damages only limit recovery to the liquidated amount for the specified breach – they do not necessarily preclude damages for other non-specified breaches.

In addition, paying liquidated damages does not normally absolve a party of its obligations to fulfill contractual duties. So for example, the payment of liquidated damages for delay in execution of a contract, does not normally absolve a party of its duty to deliver the goods or services specified under the contract, or of any quality obligations, warranties or conditions.

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