liquidated damages


  • Under the common law, liquidated damages may not be set so high that they are penalty clauses rather than fair compensation.

  • [13] Uniform Commercial Code[edit] In the United States, Section 2-718(1) of the Uniform Commercial Code provides that, in contracts for the sale of goods:[14] Damages for
    breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility
    of otherwise obtaining an adequate remedy.

  • 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 compensation at the time of breach.

  • 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 amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term [8] as assessed at the time when the
    agreement of contract was entered into.

  • Case law[edit] 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.

  • The last chapter of the bank fees saga took place in July 2016 where the High Court dismissed the appeal for leave and held that the full court was correct to characterise
    the loss provision costs, regulatory capital costs and collection costs as affecting the legitimate interests of the Bank.

  • The court found that although the liquidated damages clause may have been based on a genuine pre-estimate of loss at the time the MoU was agreed, it had not been reviewed
    or amended at the times when the agreement was amended and therefore was unenforceable.

  • [10] Contracts under common law require there to have been some attempt to create an equal or reasonably proportionate quota between the damages made and the actual loss.

  • In 2015, the full court overturned Justice Gordon’s first instance judgment that credit card late payment fees charged by ANZ to its customers constituted penalties at law
    and equity (and were therefore largely unenforceable).

  • 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.

  • [8] One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance.

  • [18] The Court asserted that the fact that those categories of costs could not be recovered in an action for damages did not alter that conclusion.

  • The aggrieved party may demand either the stipulated damages or performance of the principal obligation, but may not demand both except for delay.

  • 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.

  • [citation needed] For a liquidated damages clause to be upheld, two conditions must be met.

  • The High Court found that fees were not incapable of being characterised as penalties merely because they were not charged upon breach of contract.

  • The definition and scope extended[edit] In Australia, the definition of liquidated damages applies to the situations where upon the failure of a primary stipulation, imposes
    a detriment to the first party or a benefit to the second party by a secondary stipulation collateral to the primary stipulation (i.e.

  • Common law Generally, at common law, a liquidated damages clause will not be enforced if its purpose is to punish the party in breach rather than to compensate the injured
    party,[5][6][7] in which case it is referred to as a penal or penalty clause.

  • Judges may adjust excessive contract penalties, but such clauses are not generally void as a matter of French law.

  • High Court Other legal systems Civil law[edit] Civil law systems generally impose less severe restrictions on liquidated damages.

  • Liquidated damages, also referred to as liquidated and ascertained damages (LADs),[1] are damages whose amount the parties designate during the formation of a contract[2]
    for the injured party to collect as compensation upon a specific breach (e.g., late performance).

  • Further, neither the fact that the late payment fees were not genuine pre-estimates of damage nor the fact that the amounts charged were disproportionate to the actual loss
    suffered by itself rendered the late payment fees penalties.

  • [4] 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).


Works Cited

[‘Barker, C., Construction: Law: Liquidated Ascertained Damages (LADs), published 14 August 2018, accessed 15 May 2020
2. ^ Lehman, Jeffrey; Phelps, Shirelle (2005). West’s Encyclopedia of American Law, Vol. 3 (2 ed.). Detroit: Thomson/Gale. p. 180.
ISBN 9780787663674.
3. ^ Lehman, Jeffrey; Phelps, Shirelle (2005). West’s Encyclopedia of American Law, Vol. 7 (2 ed.). Detroit: Thomson/Gale. p. 58. ISBN 9780787663742.
4. ^ Office of Fair Trading, “Calculating fair default charges in credit
card contracts: A statement of the OFT’s position”, published April 2006, accessed 15 May 2020
5. ^ Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1, [1915] AC 79.
6. ^ Amev-Udc Finance Ltd v Austin [1986] HCA 63, (1986)
162 CLR 170, High Court (Australia).
7. ^ Esanda Finance Corp v Plessnig [1989] HCA 7, (1989) 166 CLR 131, High Court (Australia).
8. ^ Jump up to:a b Goetz, Charles J.; Scott, Robert E. (1977). “Liquidated damages, penalties and the Just Compensation
rule: Some notes on an enforcement model and a theory of efficient breach”. Columbia Law Review. 77 (4): 554–594. doi:10.2307/1121823. JSTOR 1121823.
9. ^ Jump up to:a b Deane, J., Liquidated damages clause unenforceable?, Gannons Solicitors, accessed
5 March 2021
10. ^ British Institute of Facilities Management, Getting Started with the NEC3 Term Services Contract, accessed 23 June 2015
11. ^ Fordham Law Review, Liquidated Damages: A Comparison of the Common Law and the Uniform Commercial
Code, 1977, accessed 5 March 2021
12. ^ Bailey, A. L. and Treiman, D., Defining the Limits of Liquidated Damages Clauses, published 31 December 2014
13. ^ Jump up to:a b Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30.”judgment
summary” (PDF). High Court (Australia). 6 September 2012.
14. ^ “§ 2-718. Liquidation or Limitation of Damages; Deposits”. Legal Information Institute. 2012-11-20. Retrieved 17 March 2015.
15. ^ “The Office of Fair Trading: OFT welcomes High Court
ruling on unarranged overdraft charges”. Archived from the original on 2009-01-23. Retrieved 2009-05-05.
16. ^ Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35 (5 February 2014), Federal Court (Australia).
17. ^ Australia
and New Zealand Banking Group Limited v Paciocco [2015] FCAFC 78 (5 June 2015), Federal Court (Full Court) (Australia).
18. ^ Paccioco v Australia and New Zealand Banking Group Limited [2016] HCA 28 “judgment summary” (PDF). High Court (Australia).
27 July 2016.
19. ^ Clarke, Joanne. “”Clause pénale” v. liquidated damages – any similarities?”. Kluwer Construction Blog. Archived from the original on 2 April 2015. Retrieved 17 March 2015.
20. ^ “Civil Code” (PDF). Ministry of Justice (Japan).
Retrieved 17 March 2015.
21. ^ Louisiana Civil Code, Article 2005: Parties may stipulate the damages to be recovered in case of nonperformance, defective performance, or delay in performance of an obligation.
accessed 23 June 2015
22. ^ Louisiana Court of Appeal, Second Circuit, Mary Mobley v. Gary Mobley, No. 37,364-CA “Archived copy” (PDF). Archived from the original (PDF) on 2015-06-23. Retrieved 2015-06-23.
23. ^ Louisiana Civil Code, Article 2007,
accessed 23 June 2015
24. ^ Louisiana Civil Code, Article 2012 accessed 23 June 2015. See also Isom, H. Chervis. “Specific Performance: The Importance of a Clear Liquidated Damage Provision”. Baker Donelson.
Retrieved 17 March 2015.
25. ^ Jobst, Andreas A.; Solé, Juan (March 2012). “Operative Principles of Islamic Derivatives – Towards a Coherent Theory” (PDF). IMF. International Monetary Fund. pp. 16, 27. Retrieved 11 November 2021.
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