Liquidated Damages and Unliquidated Damages: A brief Study

This Article is written by Akanksha Chowdhury from Amity University Kolkata. The article talks about Liquidated and Unliquidated Damages along with various case laws dealing under it. It also talks about advantages which are there in both these damages along with provisions of breach.

INTRODUCTION

At common law, damages are a remedy in the form of a monetary award to be paid to claimant as compensation for loss or injury. The damage must involve damages to property, or mental or physical injury etc. A court usually gives the amount that will help to restore the injured party to the economic position they expected from the performance of the promise or promises on a breach of contract by a defendant. Liquidated damages are meant as a fair representation of losses in a situation where actual damages are difficult to ascertain. Unliquidated damages are a type of compensation that is considered at large which means that the amount is not stated when a contract is established, instead these damages are determined by a judge or jury in a court.

Types of Damages

General and Special Damages –

Any damage that emerges in the natural course of events is known as general damages while damages that emerge under any circumstance and were already expected is called special damages.

Nominal Damages

These are damages that are awarded to the plaintiff in cases where the court decides that the plaintiff suffered a legal wrong but no real financial loss as such.

Punitive damages

These damages are not fixed by law, the judge and jury may award at its discretion whatever sum is believed necessary to redress the wrong, also a Jude can remit these damages if they consider it to be excessive.

Liquidated and Unliquidated damages

In the case of contracts, parties might agree to pay a certain amount on breach of the contract. When such provisions are present in the contract they are known as liquidated damages while damages that are given by the courts on basis of assessments of the loss or injury caused to the party suffering such breach of contract, they are called unliquidated damages.

Breach of Contract

Before understanding what breach of contract is all about. So, when one party infringes any of the provisions of a contract in a manner due to which the other party has to face losses then it is considered to be a breach of contract however before a breach of contract can be noticed there are few conditions have to be fulfilled such as –

> The contract should be valid which means there should be offer, acceptance, capacity to contract etc.

>A plaintiff who claims damage has to prove to the court that the defendant has breached the contract.

>The plaintiff should have fulfilled his part of the contract

Liquidated Damages

As per black law, before entering into any contract the parties decide an amount of money which has to be paid by the one who performs breach of contract this is termed as liquidated damage.

In India liquidated damages is covered under section 73and 74 of the Indian Contract Act.

Section 73 – This section deals with compensation for loss or damage that is caused by breach of contract. When any contract is broken the party, who is responsible for it has to pay certain compensation to the other party. Such kind of compensation is however not to be given for any remote and indirect loss or damage sustained by reason of breach.

Example – Suppose B get into a contract for selling and delivering 10 kg of rice to C however soon he breaks his promise, due to which now C is entitled to compensation from B for the loss he faced.

Section 74 – According to this section if a contract is broken and a sum is mentioned in the contract for any breach that might be caused later then the party is entitled to it whether or not actual damages are proved.

Example – Suppose A borrows Rs 500 from B and gives him a bond for rupees 600 which will be payable through instalments now if he fails to do it, he has to pay the whole money (rupees 500)that is due to B.

Prerequisites to Claim Liquidated Damages

Breach of contract – It is necessary for claiming of damages, so until and unless there is any breach of contract no compensation can be awarded to any of the parties also damages can be claimed in the case of anticipatory breach of contract.

Causal link – There must be a link between the breach that is committed and the loss suffered for a claim of damage, however if this is absent then compensation cannot be awarded.

Proof of damage – There should be a proof of damage or loss or injury present otherwise the compensation cannot be awarded for claiming of liquidated damages.

Unliquidated Damages

Damages that are claimed for unforeseeable loss are known as unliquidated damages, however determining the exact amount for compensation is a bit difficult in this case since the amount is unliquidated. For awarding these damages the court takes a compensatory approach such as it tries to restore the loss sustained by the plaintiff, help the plaintiff in getting back to its previous position, avoid penalization of the defendant in any manner.

The main motive behind these damages is that it helps pries suffering from a breach of contract to demand for damages for unforeseen losses, however certain requirements are to be fulfilled without which compensation cannot be provided. It is extremely necessary for including a provision for unliquidated damages in a contract as it helps the parties to recover those losses which are not possible to estimate , also the problem with this type of unliquidated damage is that the party claiming it has to prove that the loss is due to the breach of contract .

However, if a party was aware that there might be certain unforeseen events which may cause problem in performance of the contract and still did not take any step for stopping it then damages cannot be awarded.

Case laws

Fateh Chand v. Bal Kishan Das

In this case provision was eliminated under English law which was in relation of the difference between payment of liquidated damages and stipulation penalty. The Supreme Court has held that the effected party was entitled to a certain compensation which should not exceed a particular sum of penalty or re discussed amount which had to be paid after breach of contract. The court also mentioned that the usage of all these provisions was not particularly confined to some cases in which the effected party comes to the court for seeking relief.

In the following case section 74 was interpreted on the basis of either predetermined agreement compensation or penalty.

ONGC vs Saw Pipes Limited

In this particular Supreme Court had held that in case of any sort of damage with respect to section 73 and 74 and has to be read together and the damages which are liquidated I nature has to be granted in those cases whereby it is very much difficult to prove the exact loss or damage which has been incurred as per the fact that it should be a type of reasonable compensation but in cases of deciding compensation the terms and conditions should be taken into proper consideration .

J.B. Ross and Co. vs C.R. Scriven and Ors.

In this case, the court had given the judgement in favor of the plaintiffs with reference to the right of unliquidated damages that arose upon a certain breach of contract between the plaintiffs and the defendant. The damages which were claimed by the plaintiffs were actually based on a rule that was ordinary in nature i.e. the difference between ordinary price and the market price during the time of contract made. The problem which arose over here was that the defendants did not make timely appearance with respect to the provision that was clearly mentioned in the contract and duly signed by them.

Conclusion

In order to conclude, I would like to say that there are certain advantages of both these damages. In a provision for unliquidated damages, the contract made will mostly prove to be a bigger advantage. The particular contract will help in recovering the losses by the client which were earlier a breach in the contract, unforeseen or even really very tough to estimate about it. The fact over here is that it originally results in contractor to have a liability that is fully unknown. Adding to this, the client has the obligation so as to remove his or her actual loss during the breach.

Latest Posts

Archives