Liquidated damages

It means that is it shall be taken as a sum which the parties have by contract accessed as damages to be paid whatever may be the actual damage. A fixed figure of damage, which is not accessed for all circumstances, but is guaranteed to correspond with passage of time between the making of contract and of its breach, is a proper estimate of the damages to anticipate from the breach, and is revocable as liquidated damages.

The principle

The parties to a contract may agree at the time of contracting that, in the event of a breach the party in default shall pay a stipulated some of money to the other, or may agree that in the event of breach by one party any amount paid by him shall be forfeited. If the sum is a genuine pre estimate of damages likely to flow from the breach it is called liquidated damages. But if it is an amount intended to secure performance of the contract it may be a penalty.

Purposes of provision of Liquidated Damages

It facilitates calculation of risks.
It alleviates the difficulties and expenses of proving actual damage or loss and facilitates recovery of damages.
It avoids the difficulties in assessment, even where the consequences of breach are ascertainable.
It avoids the risk of under compensation.
It gives the promisee an assurance that he may safely rely on the fulfillment of the promise.

Rules for determining the question:-

Where a contract provides that upon a non- payment of money larger sum shall there upon become forthwith payable the latter is always deemed to be a penalty.
Where a contract contains a condition for payment of a sum of money to secure the performance of several stipulations of varying degrees of importance, and for the breach of sum of which damages might be deemed to be liquidated but for others unliquidated such as sum is prima facie penalty and not liquidated damages.
Where the damage resulting from breach of contract all together uncertain especially a single breach is specified and yet a definite sum of money , reasonable in amount , is expressly made payable in respect of it such provision is not in the nature of penalty, but liquidated damages , and
Where a single lump sum is to be paid by way of compensation in respect of many different events, some occasioning serious, some trifling damage, and the damage caused by each and every one of these events, however varying importance, is of such an uncertain nature that it cannot be accurately ascertained it is again not a penalty but liquidated damages.

Legal Provisions:

Section-73: Section 73 covers unliquidated damages. Supreme Court in its judgement (1) AIR 1962 SC-366 and (2) Air 1975 Kant-146 has held that in a suit for damages for breach of contract (under section 73), the plaintiff has not only to establish that alleged breach of contract, but he has further to establish that he has discharged the statutory duty cast upon him by the explanation of section 73 of the Act. The statutory duty which is required to be discharged is to take all reasonable steps to mitigate the loss consequent upon the breach of contract.

DAMAGES NOT PAYABLE WHEN LIQUIDATED DAMAGES LEVIED

Where the parties name in a contract reduced to writing a sum of money to be paid as liquidated damages they must be deemed to exclude the right to claim an unascertained sum of money as damages. The right to claim liquidated damages is enforceable under section 74 of the Contract Act and where such a right is found to exist no question of ascertaining damages arises. Where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they at the same time intended to allow the party who has suffered by the breach to give a go by to the sum specified and claim instead a sum of money which was not ascertainable or ascertainable at the date of the breach.

The effect of section 74 of the Indian Contract Act is that a party cannot get the full amount mentioned in the contract as a matter of absolute right or as a matter of course. But if the party proves that he has suffered damage to the extent of the full amount or that the Court considers, even without any proof that the full amount is a reasonable compensation which can be awarded under the circumstances, the Court can award the full amount. One thing is however certain, that the party is entitled to get some amount, not exceeding the sum named, which the Court considers as reasonable compensation, whether any actual loss or damage is proved to have been suffered by him.

LIQUIDATED DAMAGES RECOVERABLE ONLY WHEN LEGAL INJURY SUFFERED

Section 74 of the Indian Contract Act, 1872 does not dispense with the basic condition of the breach resulting in any loss or damage, which can be called "legal injury". The party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of "legal injury" having been sustained on account of such breach. The words in Section 74 "whether or not actual damage Or loss is proved to have been caused thereby" have been employed to underscore the departure deliberately made by the Indian Legislature from the complicated principles of English Common Law and also to emphasize that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. Thus, Section 74 deliberately states that what is to be awarded is a reasonable compensation. In a case where the party complaining has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him, for there is nothing to recompense. Therefore, he will not be entitled to compensation.

Conditions

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. 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.

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