The ideology of damage plays a crucial role in the law of contracts. Damages are an integral method of law enforcement that is crucial to compensate the wronged party for any harm.

Contract laws universally deal with two types of damage: liquidated and unliquidated damages. You might be wondering what they are and what they might be. Well, don’t worry, we’ve got you covered. In this article, we will talk in detail about liquidated vs. unliquidated assets and the basic differences between them.

This blog will also talk about how it also plays an important role when it comes to drafting contracts.

Types of Damages in the Legal Context

Three different types of compensatory damages encompass the overall legal context. Let’s see what they are:

• Economic Damages: In this case, the damages are awarded based on the recovery of money or other financial losses.
• Non-Economic Damages: These damages make up for those damages that cause emotional harm or any other bodily harm.
• Punitive Damages: These damages, on the other hand, impose additional punishment on the guilty party.

What are Liquidated Damages?

Liquidated damage is damage where there are already enough provisions for this if the breach happens in any way. These damages are previously agreed upon while entering into the contract. Hence are usually mentioned in the clauses of the contract itself.

Even though the number of liquidated damages remains fixed. There isn’t any window to modifying those clauses once the contract is signed.

This section briefly provides for provisions where the aggrieved party is suitable to receive entitled and reasonable compensation for any loss sustained by them. The compensation must be genuine and pre-estimated of any probable loss or damage that comes along with the breach.

Examples of Liquidated Damages

Liquidated damages are those damages that are very difficult to measure in any accurate way. For instance, suppose an agreement takes place to purchase a home. It might include clauses that even require the buyers to forfeit their deposit if the deal fails to go through. Other than that, a contract between the two companies includes liquidation damages if the trade secrets of the other company are shared unintentionally or improperly.

What are Unliquidated Damages?

These are damages that aren’t pre-agreed and are assessed by the court or any form of arbitration. This would prove that the breach of contract took place in a way.

The damage to these would be properly calculated based on the actual loss or damage that took place. The non-breaching party can receive all types of compensation and loss of damages that are generally suffered as the natural breach consequence.

Comparative Analysis Between Liquidated Damages vs. Unliquidated Damages

There are major differences between liquidated damages and unliquidated damages. Let’s see what they are:

Legal Implications of Liquidated and Unliquidated Damages

The legal implications of both liquidated and unliquidated damages are almost the same. If there happens to be a contractual breach, that can make the parties suffer losses, and this can help the party to recover proper general monetary damages through it.

However, the implications suggest that the innocent party must prove both the damages and the breach in this scenario and recover all sorts of general or unliquidated damages. The level of damages is the monetary sum that should be awarded to put the innocent party back on track.

Remember that it is very common for parties to agree to liquidated damages beforehand. However, any sort of delay in this can result in further damage as well. Other than providing an exhaustive remedy for any particular form of breach, the contract might have a cap of limit on the total sum of liquidated damage.

Issues to Look for When Implementing the Clauses of Liquidated Damage

Even though liquidated damages have been defined beforehand, certain clauses can be uncertain. Those clauses can either be void for being uncertain or hence can be unenforceable if it’s not clear. Let’s examine those issues in detail:

If the breaching event doesn’t fall into the scope of anticipatory breach expected in the clause of the liquidated damage. In that case, the clause won’t take any effect.

If the liquidated damages are supposed to have an exhaustive remedy for capturing any sort of delay, the clause should be drafted properly to make it clear. However, you should be aware that if the liquidated damages are solely responsible when there’s a delay, the clause will hence be challenged. Later on, it would be you as an innocent party won’t have any more entitlement to claim any sort of general damage for breach.

Sometimes, it also becomes a huge liability to pay any sort of liquidated damage that depends upon an innocent party complying with a condition precedent. In this case, you may have to notify the defaulting party of the breach and even allow the party a proper time to remedy those breaches.

If a standard form of contract is put into use. Both parties should be very careful about completing the rate of the liquidated damages in the appendix as well as in the schedule.

Inclusion of the Clause of Liquidated Damages

The inclusion of the clause of liquidated damages is not only isolated from the other contractual terms. For eg., if a contract provides proper liquidated damages for delay. A consideration for the circumstances where you as the contractor prevented completion due to something the other party might have done.

Hence, this difficulty is further remedied by extending the overall time provision helping the parties to explain and extend their overall time period. This clause ensures that you are not liable for paying liquidated damages because of something your counterparty has done. This is something that extends beyond your control.

Sometimes you’d even like to pass down liability for various liquidated damages just under the main contract to another person who acts as a subcontractor.

If a contract gets delayed, the liability for liquidated damages would arise quickly and it might even get terminated before completing it.

If the contract is on its way to providing for a limit or even a cap for all the liquidated damages. The parties can also end up stating whether and apparently in what circumstances the cap will be applied to any claims of general damage.

What are the Advantages of Liquidated Damages in a Contract?

One of the major advantages of using liquidated damages in a contract is when they come up with certainty and predictability in the breach. This is done by both the parties. Moreover, agreeing to this specific amount of it upfront also helps the parties to avoid any kind of lengthy and legal disputes over the caution damage.

When Can You Enforce Liquidated Damage?

Liquidated damages are primarily enforceable when there is a potential reason or proportion to the losses incurred that can even result in a contract breach. However, courts can invalidate liquidated damages if the penalties are deemed the real damage estimate.

Use of Liquidated Damages vs. Unliquidated Damages in Drafting Contracts

The confusing choice between liquidated and unliquidated damages depends on the contract. It also largely depends on the type of breach that might take place with it and the parties most likely involved in it. Its important to draft the liquidated damages clause without any mistakes and avoid any sort of ambiguity or dispute even at a later stage.

Here are Some Characteristics a Well-drafted Liquidated Damages Clause Should Contain:

• Mentioning the damage amount in a clear way and the provision of paying it in cash in case of breach.
• Explaining the overall nature of the breach resulting in damage payment.
• Specifying the time frame within which the damages should be paid.
• Ensuring that the damages are reasonable and nothing out of the blue.

Final Thoughts…

It’s important to remember that while drafting a contract, damages are not quantifiable. Hence, it’s crucial to understand the simple difference between them.

We hope you found this blog informative and helpful. Let us know if we missed out on anything or not.

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