Liquidated
damages is a term use in the law of contracts to
describe a contractual term which establishes damages to
be paid to one party if the other party should breach the
contract. Under the common law, a liquidated damages
clause will not be enforced if the purpose of the term is
solely to punish a breach of contract (in this case it is
a penal clause). This is because such a clause does not
allow the court to determine actual damages, and its
enforcement would therefore 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. 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.
For example, suppose Joey agrees to lease a storefront to
Monica, from which Monica intends to sell jewelry. If
Joey breaches the contract by refusing to lease the
storefront at the appointed time, it will be difficult to
determine what profits Monica will have lost, because the
success of newly created small businesses is highly
uncertain. This, therefore, would be an appropriate
circumstance for Monica to insist upon a liquidated
damages clause in case Joey does indeed fail to perform. |
