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Liquidated Damages Vs Penalty Details

The document outlines the differences between liquidated damages and penalties in contract law, emphasizing that liquidated damages are intended to compensate for anticipated losses while penalties serve as punishment for breaches. It details the legal framework in India, highlighting that liquidated damages are enforceable if reasonable, whereas penalties are often deemed excessive and unenforceable. Judicial interpretations and practical applications in various contracts are also discussed.

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28 views3 pages

Liquidated Damages Vs Penalty Details

The document outlines the differences between liquidated damages and penalties in contract law, emphasizing that liquidated damages are intended to compensate for anticipated losses while penalties serve as punishment for breaches. It details the legal framework in India, highlighting that liquidated damages are enforceable if reasonable, whereas penalties are often deemed excessive and unenforceable. Judicial interpretations and practical applications in various contracts are also discussed.

Uploaded by

manojdoot321
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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LIQUIDATED DAMAGES VS.

PENALTY - COMPLETE DETAILS

1. INTRODUCTION

Liquidated damages and penalty are contractual terms related to consequences of breach of

contract. While both involve payment, they differ in purpose, enforceability, and legal treatment.

2. LIQUIDATED DAMAGES

Definition: Pre-agreed amount payable on breach, intended as a genuine estimate of expected loss.

Purpose: Compensates the aggrieved party for anticipated harm.

Key Features:

- Pre-determined in the contract

- Must be a reasonable estimate

- Enforceable if not excessive

- No need to prove actual loss in many cases

Legal Position in India:

- Governed by Section 74, Indian Contract Act, 1872

- Reasonable compensation awarded even if no actual loss is proven

3. PENALTY

Definition: A sum meant to punish, rather than compensate.

Purpose: Acts as a deterrent for breach.


Key Features:

- Often excessive and not a real estimate of loss

- Generally unenforceable

- Courts may strike down or reduce

Legal Position:

- Section 74 also governs penalties

- Court allows only reasonable compensation

4. DISTINCTION BETWEEN LIQUIDATED DAMAGES AND PENALTY

| Aspect | Liquidated Damages | Penalty |

|----------------------|-------------------------------------------|------------------------------------------|

| Purpose | Compensation for expected loss | Punishment or deterrent |

| Enforceability | Enforceable if reasonable | Usually not enforceable if excessive |

| Estimate of Loss | Genuine pre-estimate | Arbitrary or exaggerated |

| Court's Approach | Generally upheld | May reduce or invalidate |

5. LEGAL TESTS TO DIFFERENTIATE

- Genuine pre-estimate of loss?

- Disproportionate or extravagant?

- Single sum for multiple breaches?

- Parties' intention?

6. JUDICIAL INTERPRETATION

- India: ONGC v. Saw Pipes (2003), Fateh Chand v. Balkishan Das (1963)

- UK: Dunlop v. New Garage (1915), Cavendish v. Makdessi (2015)


7. PRACTICAL USE

Common in:

- Construction contracts

- IT/software projects

- Lease and supply agreements

8. SAMPLE CLAUSES

A. Liquidated Damages Clause:

"If the Contractor fails to complete the work by the agreed date, they shall pay INR 1,00,000 per day

of delay as liquidated damages, up to a maximum of 10% of the contract value."

B. Penalty Clause:

"In case of any breach, the Contractor shall pay INR 25,00,000 as penalty." (This is likely to be

struck down as excessive.)

9. CONCLUSION

Liquidated damages are enforceable if they represent a genuine pre-estimate of loss. Penalty

clauses are generally unenforceable unless reasonable. Courts prefer compensation over

punishment.

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