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
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
The situation where both parties tour contract agrees that the contract
itself will stimulate the penalty for the breach of the contract that is
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.
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
- Storage cost
- Loss of rent
- 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 
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
Liquidated damages are not applied when:
Cases & examples:
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.� 
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.
The case of Thermax Babcock And Wilcox Ltd vs. Addl. Commission
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.
- ibid 3
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