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Liquidated Damages: In What Situations Does It Not Apply

The essence of a contract begins with the promise of honoring the contract arising out of the agreement so entered. However, the circumstances are not evergreen. While deciding the remedies of the non - performance of the same and inserting the liquidated clause proves to be one the most salvage clause of the parties who is prone to suffer or bear the burden of non-performance or breach of the contract.

The modus operandi of such clauses happens to be quite useful in cutting out the ambiguity related to the subject matter. The liquidated damages clause speaks for the agreed amount fixed as per the anticipation of the parties if either of them fails to hold their end of the bargain as stipulated in the contract.

One of the important features for the inclusion of such a clause is to save time, money, and energy on potential disputes in this regard. Now where there is a contract, there will be a breach. Where there is a breach, there will be damages. Where damages occur, there will be compensation. Compensation inevitably generates types of damages, that is Liquidated Damages and Unliquidated Damages.

How are liquidated damages different from unliquidated damages?

  • Liquidated Damages:

    At the time of making a contract when the parties fix the amount of compensation for the breach of contract or the amount of loss at the time of the breach, so it can be in the form of Liquidated Damages. Liquidated damages are the estimation of loss suffered by other parties.

    In liquidated damages the amount of the compensation is predetermined. Liquidated damages are mostly given in Contract Act as in this it is already decided that any person who breaches the contract, so how much money they have to pay.
  • Unliquidated Damages:

    In Law of torts, unliquidated damages are given. In unliquidated damages, it is not pre-determined as it is, liquidated damages. In this, it is not pre-determined that how much compensation will be given on the infringement on the right of a person. The amount of compensation will be decided by the court on a case-to-case basis by determining the facts and offenses. It is observed that the offense is how many graves and dense.

When are liquidated damages awarded to a party?

Liquidated damages are awarded under section 74 of the Contract Act. When the contractual parties have right to claim the amount and no question of ascertaining damages arises. Section 74 of the Indian Contract Act further deals with:
The situation where both parties tour contract agrees that the contract itself will stimulate the penalty for the breach of the contract that is liquidated damages.

Section 73 of the Indian Contract Act says that if there is no loss from the breach of contract then no damage will be awarded. Hence, the damage will only be awarded when there is actual loss from the breach. Compensation is not paid for any remote or indirect loss or damage sustained because of the breach.[1]

How are they calculated in construction?

In case of a breach of contract in construction contracts, there is a clause that offers that the other party will pay liquidated damages to the owner of the construction project if they fail to complete the allocated work at the date agreed on the contract. Liquidated damages are generally calculated on a daily or weekly rate and the amount depends on the value of the property. As it is liquidated damage so the value is pre-determined.

Calculation of liquidated damages include:

  • Storage cost
  • Loss of rent
  • Fees
  • Loss of income
  • Finance cost
  • Rental costs

The general formula to calculate liquidated damage is:

Contract Cost + Total Extended Cost + Total Project Cost + Contract Duration = Liquidated Damages [2]

When do they not apply:

If the party enters into a contract with the state or central government for the performance of an act in the interest of the general public then a breach of such contract makes the party liable to pay the entire amount it mentioned in the contract.

Liquidated damages are not applied when:

  • Waiver:
    When there is a breach of contract, the employer can either elect to affirm the breach and claim liquidated damages or ignore the same grand continuation of the contract. In case he chooses not to elect the breach as a repudiatory breach, he is disentitled to claim liquidated damages. He would have said to waive off his right to claim liquidated damages and the right to claim the same will be forfeited.
  • Employer himself is at fault:
    Where a clause in the contract stipulated levy of liquidated damages if the work is not done with due diligence and the delay occurred due to failure on the part of the employer to supply materials in the required time. It was held that imposition of damages by the employer could not be justified.� [3]

Cases & examples:
According to the facts of the case Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd on 17th April 2003, the following was observed by the court
The law is very clear on this point that if the terms and conditions of the contract are obligatory to be taken in consideration before arriving at the conclusion, the party claiming damages are entitled for it.

If the terms and conditions are clear and explicit stipulating the liquidated damages in case of breach of contract until and unless it is held that such aforementioned damage or compensation is unreasonable. The party who has committed breach has to pay such compensation which is stated under section 73 of the Contract Act.[4]

The case of Thermax Babcock And Wilcox Ltd vs. Addl. Commission Of It, 2nd March 2007, it was held that in the contract agreement with Kanoria Chemicals & Industries Ltd, the clause of Liquidated damages states:
that in the case of delay in the commission of the complete equipment beyond 25th October 1995, liquidated damages at the ate of 1% per week subject to maximum the ex-work price shall be applicable.�� So, by this, they have to pay compensation on the fault of their part.[5]

  5. ibid 3

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