LIQUIDATED DAMAGES

Guided By
Prof. Vilas S. Mahajan
By
Jay Pratap Singh Yadav FP14025
Nekzad Pandol FP14032

LIQUIDATED DAMAGE
Sum of money (agreed-to and written into a contract) specified as the
total amount of compensation an aggrieved party should get, if the
other party breaches certain part(s) of the contract. The contract also
establishes what actions or failures to act constitute a breach.
For the agreement to be legally enforceable, the nature of the contract
should be such that it is difficult to determine actual damages, and
the amount of damages should be reasonable under the circumstances.
Otherwise law may regard the specified amount as a fine (included in
the contract primarily to force its proper performance) and not a
compensation for injury.
In such cases, the damages are deemed 'unliquidated damages' and
are assessed by a court according to the merits of the case.

NECESSARY CONDITIONS
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.

EXAMPLE
Suppose Mr. A agrees to lease a store-front to Mr. B,
from which Mr. B intends to sell jewelry.
If Mr. A breaches the contract by refusing to lease the
store-front at the appointed time, it will be difficult to
determine what profits Mr. B will have lost because the
success of newly created small businesses is highly
uncertain.
In such circumstance, it will be an appropriate for Mr. B
to insist upon a liquidated damages clause in case Mr. A
fails to perform.

HISTORY
Historically, this area of the law developed from Equity (law
developed 300 years after common laws to assist common
laws) which granted relief against the harshness of penal
bonds.
A penal bond was a form of assurance whereby an individual
would bind himself to pay a definite sum of money in the
event he failed to perform another primary obligation.
The equitable principle granting relief against such bonds
later was adopted by courts of law and remains today as the
foundation for the rule that penalties are void and
unenforceable.

INDIAN CONTRACT ACT 1872

CLAUSE 74
Compensation for breach of contract where penalty stipulated for
When a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the
contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage
or loss is proved to have been caused thereby, to receive from the
party who has broken the contract reasonable compensation not
exceeding the amount so named or, as the case may be, the penalty
stipulated for.

INDIAN CONTRACT ACT 1872

THE CONSEQUENCES OF BREACH OF CONTRACT
CLAUSE 73
Compensation for loss or damage caused by breach of contract
When a contract has been broken, the party who suffers by
such breach is entitled to receive, from the party who has
broken the contract, compensation for any loss or damage
caused to him hereby, which naturally arose in the usual
course of things from such breach, or which the parties they
made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and
indirect loss of damage stained by reason of the breach.

Case Study

BENEFITS
The purpose of such clauses is to promote certainty,
especially in commercial contracts.
Parties to a contract would fix such a sum in advance at the
time of making the contract because it facilitates calculation
of risks; it reduces the difficulty and expense of proving
actual damage or loss and facilitates recovery of damages.
It also avoids the difficulty in assessment, even where the
consequences of breach are ascertainable and avoids the risk
of under-compensation
It gives promise an assurance that party may safely rely on
the fulfillment of the promise.

Real Case Example

ONGC v/s Saw Pipes
Published March 2011

Oil and Natural Gas Commission had placed an

order on Saw Pipes for supply of equipment for off
shore exploration, to be procured from approved
European manufacturers.
The delivery was delayed due to general strike of
steel mill workers in Europe.
Timely delivery was the essence of the contract.
ONGC granted extension of time, but it invoked the
clause for recovery of Liquidated Damages(1.5% /
week delay of total amount) by withholding the
amount from the payment to the supplier. ONGC

Judgment

While the arbitral tribunal rejected Saw Pipes defense of force majeure,
it required ONGC to lead evidence to establish the loss suffered by
breach and proceed to hold, in absence of evidence of financial losses,
that the deduction of Liquidated damages was wrongful.
The award was challenged by ONGC; inter alia as being opposed to
public policy ONGCs case was that the arbitral tribunal failed to decide
the dispute by not applying the prevailing substantive law, ignoring the
terms of the contract and customary practices of usage of trade in such
transactions. ONGC challenged the award as being patently illegal.
The single judge and division bench of BombayHigh Courtdismissed
the challenge. The Supreme Court set aside an arbitration award
directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards
liquidated damages retained by it while making payment to the
company.