When a breach of contract occurs, there must be a remedy of damages. This is the payment in one form or the other for a breach of contract by the breaching party, to the non-breaching party. There are various kinds of remedies, which include; Compensatory damages, Punitive damages, and Liquidated damages. In the law of contract, when a breach of contract occurs, the non-breaching party has to do all he/she can in order to minimize, the damages caused by the breach (Calamari and Perillo 45). However, some contracts contain provisions that specify a certain sum of money that is payable by the breaching party, incase he/she fails to perform his/her duties as required by the contract signed. This sum of money paid for a breach of contract is known as, liquidated damages. The liquidated damages payable after a breach of contract are based on a reasonable estimate of the value of the promised performance, in the breached contract. The identified parties of the contract always spell out liquidated damages earlier in a contract.
Damages are liquidated in a contract if; the amount is reasonable, and considers the anticipated harm caused by the contract breach, if there is difficulty in proving the loss, and if, there is a difficulty of finding another adequate remedy for the breach of contract. Secondly, damages in a contract are liquidated if the injury is uncertain or is difficult to quantify. In addition, the damages are supposed to be structured to function as damages, and not as a punishment (David 1613). If the above is not met, a liquidated damage will be considered as void.
On the other hand, liquidated damages may not apply after a breach of contract if the liquidated damages clause was not included in the formation, and before signing the contract. In addition, according to the common law, the liquidated damages clause will be unenforceable, if it is meant to punish the person who breaches the contract, rather than to compensate the injured party. If the clause is referred to as penalty clause in a contract, it will not apply in a breach of contract, because, its enforcement will require a specific performance equitable order. Nonetheless, hours of sitting in equity will seek to achieve a fair result, other than enforcing a clause that seeks to punish or that may lead to unjust enrichment of the enforcing or the non-breaching party.
A liquidated damages clause is upheld under two conditions. The first condition is, the amount of damages acknowledged must approximate the damages likely to fall upon the party seeking compensation. Secondly, the damages to be paid must be sufficiently certain at the formation of the contract, that the damages clause is likely to save both parties the future difficulty of approximating damages. If the damages are uncertain, they will now become un-liquidated damages (Dobbs 102). Many contracts that involve the exchange of money and the promise of performance must have a liquidated damages provision. The purpose of this stipulation is to establish a pre-determined sum that is payable in the breach of contract as promised.
Liquidated damages have a number of advantages and disadvantages. One main contractual advantage of liquidated damages clause is that, the parties will settle on an amount they have both agreed upon mutually (Johnson 68). It will be cheaper including the liquidated damages clause in their contract to save time, and legal fees if taken to the courts. Another advantage of the liquidated damages clause in a contract is that, it establishes a predictable cost, and this helps the parties to balance the cost that is anticipated in the case of breach of contract. It serves as a source of surety or insurance for both parties in contract and so, there will be no fear of one losing their cash or the investment in the contract. This is the reason as to why liquidated damages clause is commonly used in real estate contracts. The buyers are always guaranteed of compensation because it limits their loss. For the sellers, the buyer will deposit the money on time unless he/she wants to pay liquidated damages. The liquidated damages clause acts as insurance, to both parties in a contract. One disadvantage of the liquidated damages clause is that, some clauses provide for only a day or per month, and this can lead to a court ruling out that a clause that runs for long period is unreasonable. Another disadvantage is that, liquidated damages may lead to poor work or the delivery or non-standard goods. Many people will be compelled to deliver, even if the quality is not good in order to avoid paying liquidated damages (Goetz and Scott 560). In the case of designing or building a house, an engineer may work fast to finish the designs on time in order to avoid paying the liquidated damages, yet the work is unsatisfactory. It jeopardizes professionalism in design and delivery services.
In conclusion, for a liquidated damages clause to be enforceable it must constitute a reasonable approximation of the provable injury for compensation or else, the clause will be unenforceable. When the clause in unenforceable, the non-breaching party will be restricted to conventional damages as there will be no compensation. Damages for a breach of contract are liquidated only if the amount stated, is in reasonable light of the actual or anticipated harm caused by the breach of contract. Liquidated damages serve as a protection for both parties who have entered into contract, in case there is a breach of contract.
Goetz, Charles J. And Scott, Robert E. Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach. Columbia Law Review, 7.4 (1977): 554-594. Print.
David, Brizzee. 1991. "Liquidated Damages and the Penalty Rule: A Re-assessment." Brigham Young University Law Review 34. 4 (1991): 1613. Print.
Calamari, John D., and Perillo, Joseph M. Contracts. St. Paul, Minn.: West, 1987. Print.
Johnson, Mark J. Liquidated Damages. Business Credit 104. 3 (2002): 68
Dobbs, Dan B. Dobbs Law of Remedies: Damages, Equity, Restitution, Volume 2, Parts 6-11. Indiana: West Pub. Co., 1993. Print.