Liquidated Damages and Penalty Clauses -
Software Licence Agreements and Software Development Contracts - Part 8

Penalty Payments for Failure to Deliver

Rather than be forced to commence litigation in order to recover damages and to reduce the administrative cost of contract management, incorporation of penalty payments (liquidated damages) clauses into software license agreements is increasingly commonplace. Already, liquidated damages clauses are frequently used as the means for recovery for failure to meet agreed service levels. These liquidated damages payments come in the form of service level credits. The difficulty with liquidated damages clauses to setting the damages to be paid in the event of breach or non-performance to a level that does not qualify as a penalty or a forfeiture, which are unenforceable in the English legal system. The linchpin in determining whether a liquidated damages clause will be considered a penalty or forfeiture is whether the sum of liquidated damage is a genuine pre-estimate of the loss that will be suffered as a result of the breach that leads to the right for liquidated damages to be paid. Agreeing sums to be paid by way of liquidated damages however does not limit the payee to accept the specified or calculated sum in the event of a breach, as they may still sue for damages at large.