Liquidated damages

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

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).

At common law, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party[2] (in which case it is referred to as a penal or penalty clause).[3] One reason for this is that the enforcement of the term would, in effect, 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.[4]

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.[3]
  • 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.

Damages that are sufficiently uncertain may be referred to as unliquidated damages, and may be so categorized because they are not mathematically calculable or are subject to a contingency which makes the amount of damages uncertain.

Example[edit]

For example, suppose Neal Townsend agrees to lease a store-front to Richard Odness, from which Richard intends to sell jewelry. If Neal breaches the contract by refusing to lease the store-front at the appointed time, it will be difficult to determine what profits Richard will have lost because the success of newly created small businesses is highly uncertain. This, therefore, would be an appropriate circumstance for Richard to insist upon a liquidated damages clause in case Neal fails to perform.

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 law applied to bank and credit card charges[edit]

This law has recently been of great interest to UK bank and credit card customers who have been charged as much as £39 for a single transaction that took them over their credit limit. Consumers argued these charges were well beyond the cost of sending a computerised letter.

In 2007 the Office of Fair Trading investigated the excessively high charges being imposed on customers of credit card companies. In its report, the OFT confirmed these charges were unlawful under UK law as they amounted to a penalty. It said it would be prepared to investigate any charge over £12, though this was not intended to indicate that £12 is a fair and acceptable charge. 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 credit card companies did not produce evidence of their actual costs to the OFT, instead insisting their charges are in line with clear policy and information provided to customers.

Following the ruling, many bank customers have made County Court claims against their banks and credit card companies for return of penalty charges for returned cheques, direct debits and unauthorized overdraft charges. To date no bank or credit card company, save NatWest on one occasion, has attended at Court for a Trial.

Update[edit]

In 2008 The High Court judged that terms in bank account contracts were not capable of being penal, bar those applicable to NatWest Bank customers between 2001 and 2003.[5]

References[edit]

  1. ^ a b "Liquidated Damages" (w). Retrieved 2012-12-18. 
  2. ^ Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1; see also Amev-Udc Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170 AustLII
  3. ^ a b "Liquidated damages, penalties and the Just Compensation rule: Some notes on an enforcement model and a theory of efficient breach" (w). Columbia Law Review 77. Retrieved 2012-12-19. 
  4. ^ Liquidated Damages (w), American Law Encyclopedia 6, retrieved 2009-04-07 
  5. ^ http://www.oft.gov.uk/news/press/2008/55-08

see also Esanda Finance Corp v Plessing (1989) 166 CLR 131[1]

See also[edit]