Liquidated damages
Encyclopedia
Liquidated damages are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).
When damages are not predetermined/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).
At common law
, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause
). 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 will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment
of the enforcing party.
In order for a liquidated damages clause to be upheld, two conditions must be met.
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 contingency which makes the amount of damages uncertain.
For example, suppose John agrees to lease a store-front to Mary, from which Mary intends to sell jewellery. If John breaches the contract by refusing to lease the store-front at the appointed time, it will be difficult to determine what profits Mary will have lost because the success of newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for Mary to insist upon a liquidated damages clause in case John 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.
In 2007 the Office of Fair Trading
investigated the excessively high charges being imposed on customers of credit card companies. In its report, the OFT confirmed these charges were unlawful under UK Law as they amounted to a penalty. It said it would be prepared to investigate any charge over £12, though this was not intended to indicate that £12 is a fair and acceptable charge. The OFT said it would be up to a court to determine such an amount based on the established legal precedent that the only recoverable cost would be actual costs incurred.
The credit card companies did not produce evidence of their actual costs to the OFT, instead insisting their charges are in line with clear policy and information provided to customers.
Following the ruling, many bank customers have made County Court claims against their banks and credit card companies for return of penalty charges for returned cheques, direct debits and unauthorized overdraft charges. To date no bank or credit card company, save NatWest on one occasion, has attended at Court
for a Trial
.
When damages are not predetermined/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).
At common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause
Penal damages
Penal damages are best seen as quantitatively excessive liquidated damages and are invalid under the common law. While liquidated damages are a priori calculations of expectation loss under the contract, penal damages go further and seek to penalise a party in some way for breach of a clause above...
). One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance
Specific performance
Specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to award/ for awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential...
. However, courts sitting in equity will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment
Unjust enrichment
Unjust enrichment is a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing.Definition:...
of the enforcing party.
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.
- 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 contingency which makes the amount of damages uncertain.
For example, suppose John agrees to lease a store-front to Mary, from which Mary intends to sell jewellery. If John breaches the contract by refusing to lease the store-front at the appointed time, it will be difficult to determine what profits Mary will have lost because the success of newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for Mary to insist upon a liquidated damages clause in case John 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
Doctrine of Concurrent Delay
The Doctrine of Concurrent Delay is a contract law theory used to eliminate delay damages, under the premise that where both parties to the contract caused delays to the overall project, neither party can recover damages for that period of time when both parties were at fault....
when both parties have contributed to the overall delay of the project.
The law applied to bank and credit card charges
This law has recently been of great interest to UK bank and credit card customers who have been charged as much as £39 for a single transaction that took them over their credit limit. Consumers argued these charges were well beyond the cost of sending a computerised letter.In 2007 the Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
investigated the excessively high charges being imposed on customers of credit card companies. In its report, the OFT confirmed these charges were unlawful under UK Law as they amounted to a penalty. It said it would be prepared to investigate any charge over £12, though this was not intended to indicate that £12 is a fair and acceptable charge. The OFT said it would be up to a court to determine such an amount based on the established legal precedent that the only recoverable cost would be actual costs incurred.
The credit card companies did not produce evidence of their actual costs to the OFT, instead insisting their charges are in line with clear policy and information provided to customers.
Following the ruling, many bank customers have made County Court claims against their banks and credit card companies for return of penalty charges for returned cheques, direct debits and unauthorized overdraft charges. To date no bank or credit card company, save NatWest on one occasion, has attended at Court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...
for a Trial
Trial
A trial is, in the most general sense, a test, usually a test to see whether something does or does not meet a given standard.It may refer to:*Trial , the presentation of information in a formal setting, usually a court...
.
- OFT v Abbey