WK 8 - Liquidated Damages Clauses and Penalty Clauses Flashcards
What kind of clause is this?
‘If the manufacturer fails to deliver a bus or buses on the date or dates specified, the Manufacturer will pay to the Company £1,000 per day for every such bus for each day that delivery is delayed.’
Liquidated penalty
Why use clauses?
To facilitate recovery of damages damages without the difficult of proving actual damage.
Avoid risk of under-compensation.
Describe a liquidated damages clause
- A clause in a contract that provides in money terms what is payable where a party breaches contracts
- Enforceable clauses
Describe a penalty clause
- A clause is a contract that provides in money terms what is payable where a party breaches a contract, but one which involves an element of penalty for the breaches
- Unenforceable clauses
How might Scots law interpret penalty clauses?
In Scots law, a penalty clause might be modified by the court to remove the penalty element and render it enforceable
General rule for law of damages
‘…a party injured by the other party’s breach of contract is entitled to such money compensation as will put him in the position in which he would have been but for the breach.’
Compensatory>punitive
If the breach is failure to pay, requiring payment of a greater sum as
damages is…
a penalty.
Previous approach to liquidated damages
- If the consequences of the breach could not be estimated, the sum will
not automatically be a penalty. - Repaying deposits or forfeiting sums paid are not penalty clauses
Current approach to liquidated damages
(1) Does the wronged party have a legitimate interest to protect? [Other interests, beyond compensation, may be protected]
(2) Is the amount specified exorbitant (fair)?
(3) Primary/secondary obligations
Explain primary obligations
Key to contract and direct parties’ performance
Explain secondary obligations
Operative on a breach of the contract
No longer limited to payments
