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Author Topic: Contract Performance Guarantee and Liquidated Damages  (Read 2411 times)

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Offline Sunil Ramachandran Nair

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Contract Performance Guarantee and Liquidated Damages
« on: February 27, 2016, 12:57:19 AM »
Dear Members, In any contract, a Contractor agrees to offer Performance Guarantee for certain % of Contract Value and also Liquidated Damages for delay again to certain % of the Contract Value ( maximum extent). In an eventuality what is the maximum claim that a Client can impose on the Contractor??.. is it only to the extent of Liquidated Damage agreed or both LD and Performance Guarantee extent together? Please give your views on this. The LD is being accepted as a pre- estimated maximum loss that the Client can suffer without any question on the value... Is the Client is liable to prove/ substantiate  what is his damage to get it liquidated or he can simply claim what is agreed as per contract?? Would like to know how the law of the land will deal this.

Offline rajgopal sripathi

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Re: Contract Performance Guarantee and Liquidated Damages
« Reply #1 on: March 22, 2016, 09:56:06 PM »
There is a difference between Performance guarantee and liquidated damages:

A performance guarantee is usually provided by the contract party where within the contract they commit or guarantee to a specific level of performance for the item they delivered or constructed. If they fail to meet that committed performance the remedy available to the buyer would depend upon what the guarantee language says. For example it could provide the buyer the right to return the item and be refunded any payments made. There could be a credit to the price for the reduced value of the purchase. If the contract was silent as to remedies, the failing to meet the performance guarantee would be a breach and the buyer could pursue damages.

Liquidated damages are an amount that is pre-agreed by the parties to cover damages for work not being completed on time. The liquidated damages amount has to be a reasonable estimate of the damages you would incur. Any more than that a portion of the liquidated damages could be disallowed as a "penalty". In jurisdictions that allow for penalties, the liquidated damages amount could include penalties as part of the liquidated damages.

Now coming to your question, Maximum claim can impose on the contractor is to the extent of actual damages (subject to decision of court only and not other wise) and not to the extent as stated in Liquidated damages clause.
Since performance guarantee and liquidated damages are two different things they cannot be clubbed together.
There are leading case laws on this
Gail (India) Ltd. vs Paramount Ltd. on 30 April, 2010
2001 SCC OnLine Del 1305 : ILR (2001) 2 Del 721 Vindhya Telelinks Ltd V mahanagar Telephone Nigam Limited & Anr.   
Rajgopal Sripathi

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