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The purpose of a liquidated damages clause is to increase certainty and avoid the legal costs of determining actual damages later if the contract is breached. Thus, they are most appropriate when (a) the parties can agree in advance on reasonable compensation for breach, but (b) the court would have a difficult time determining fair ...
Under common law, a liquidated damages clause will not be enforced if the purpose of the term is solely to punish a breach (in this case it is termed penal damages). [23] The clause will be enforceable if it involves a genuine attempt to quantify a loss in advance and is a good faith estimate of economic loss.
Although the amount of nominal damages is typically small, the plaintiff can use the award of nominal damages as a justification to plead for punitive awards or appeal a violation of his or her rights that form the basis of the lawsuit, common in cases involving constitutional rights. [8] Liquidated damages
The contract did not provide for sectional completion and the court held that the sectional basis on which the liquidated damages clause was to operate was inconsistent with the single end-date for anticipated completion, meaning that Sheffield were unable to enforce a damages claim for delay. [10] [5]
Liquidated damages are an estimate of loss agreed to in the contract, so that the court avoids calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses may serve either a compensatory or a punitive purpose and, when aimed at the latter, may be referred to as "penalty clauses".
Many commercial contracts include clauses that set out a process whereby notice must be given and in what form. Consequently, if there is a written contract, care should be taken to check the contract terms and to ensure compliance notwithstanding that the other party may, on the face of it, have committed a clear and repudiatory breach.
Outside the oil and gas context, "take or pay" contract terms are often rejected by courts as unenforceable penalties. Courts look at these as "liquidated damages" clauses that must be based on a reasonable approximation of the actual damage that a party would suffer due to the other party's breach.
Penal damages are liquidated damages which exceed reasonable compensatory damages, making them invalid under common law.While liquidated damage clauses set a pre-agreed value on the expected loss to one party if the other party were to breach the contract, penal damages go further and seek to penalise the breaching party beyond the reasonable losses from the breach. [1]