Liquidated Damages Clauses and Penalties in Commercial Contracts

It was decided in 1829 that in principle, that the parties to a contract may agree set or calculated sums that would be paid by a party in the event of a breach of contract. These liquidated damages clauses are therefore enforceable. The clauses are referred to as liquidated damages clauses due to the fact that a court is not required to quantify the losses sustained by a party.

In order to be enforceable however such liquidated damages clauses may not be penal in nature.

There is no reason why the liquidated damages clause cannot be calculated with reference to a formula or time period, or where the actual damage cannot be pre-estimated with any certainty or is immeasurable at the formation of the contract.

Where liquidated damages clause is characterised as a penalty, the claimant is entitled to sue for damages and have them quantified by a court, and the measure of damage will be the actual loss proved.