http://www.wrce.org.uk

What are liquidated damages ?

In simple terms liquidated damages are an agreed amount of damages or a specified formula for agreeing damages in a contract, so as to offer an opportunity, on the face of it, for speedy recovery and non-reliance on the quite technical common law damages cases.

What are the clauses commonly used for ?

Most commonly these clauses are used in construction contracts and Hire Purchase agreements. they are also quite commonly inserted, in our experience into confidentiality agreements, where the party with highly confidential information provided to the other wants there to be a biog penalty as a deterrent against breach. However, using such a clause as a penalty or deterrent is unlikely to be legally effective (see below).

What factors determine whether a liquidated damages clause is effective or not ?

In line with established case law, the courts will take into account the following factors in deciding legitimacy of a liquidated damages clause :-

• intentions at the point the contract was concluded
• is the clause based on a genuine estimate of likely losses or intended as a penalty clause ?
• is the amount stated higher than the amount payable if the party in breach had complied
• in the contract circumstances, was a pre-estimate of loss possible ?

Ways to avoid a liquidated damages clause being within the court’s remit

The most used method of avoiding the court being able to intervene and strike out a liquidated damages clause is make the entire contract sum payable at the beginning of the contract but to defer it, as long as there is compliance. If there isn’t, the sum due for the whole contract period becomes payable and this is a very common type of clause in a hire contract.