News By/Courtesy: Priyanka Patnaik | 20 May 2020 11:11am IST


  • What is Liquidated Damages?
  • Difference Between Liquidated Damages And Penality
  • Liquidated Damages Being Recovered Without Proving Actual Loss

What are a Liquidated Damages? 
According to the Black‘s law, the definition of ‘Liquidated Damages is as follows – “An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches; also if the parties to a contract have agreed on Liquidated Damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages.”
A perusal of the above clarifies that LD is nothing but pre-estimated damage, which the parties agree while making the contract, as likely to arise in case of a breach. The Courts, while dealing with the issue of the validity of the imposition of LD by one party to the contract on the other, read Section 73 & 74 of the Contract Act together.
The same principle would, therefore, apply to a case of Liquidated damages i.e. to be entitled to claim. The aggrieved party must prove that it had suffered some loss arising out of the breach. To put it differently, even the LD cannot be claimed if it is proved that no actual damages were caused by the breach as held by the Delhi High Court in Indian Oil Corporation Vs. Messrs. Lloyds Steel Industries Limited (2007). In this case, the Court held mere delay in construction, and commissioning of the terminal at Jodhpur by the contractor did not entitle IOC to recover Liquidated Damages because there was no loss suffered by IOC. The Court found that pipeline reached Jodhpur terminal (on 31.8.1996) much after the date of completion of construction (31.3.1996) and the terminal could not be put to commercial use without pipeline reaching the terminal.
Difference Between Liquidated Damages And Penality
The liquidated damages are a pre-assessed loss agreed to between the parties at the time of making a contract, as likely to arise from the breach. A Penalty is a stipulation in the contract like terror. A penalty generally speaking is a stipulation to award an imposition which is so excessive that no prudent person would consider the same as a reasonable assessment of damages arising out of the breach. For example, a stipulation in the contract providing that the party in breach would be liable to pay ten times of the contract price to the aggrieved party in case of a breach is like a Penalty. Therefore, while both the liquidated damages as well as a Penalty are based on the stipulations mentioned in the contract itself, there is a stark distinction between the two terms. Liquidated damages represent reasonable stipulation of likely losses, a Penalty is far from being reasonable and is intended to secure the performance of the contract.
Liquidated Damages Being Recovered Without Proving Actual Loss
The Courts have repeatedly held that the provision for Liquidated Damages is not different from non-liquidated damages and in both the situations i.e. legislative damages and non-Liquidated Damages, breach and the damage has to be proved. However, when in certain situations it would be impossible for the Courts to assess the compensation arising from the breach, the Court can award the full liquidated damages if it is found to be a genuine pre-estimate by the parties as a measure for reasonable compensation.
In the case of Oil & Natural Gas Commission v. Saw Pipes Ltd (2003), the Supreme Court held that Arbitral Tribunal was wrong in refusing to award LD in favour of ONGC for want of proof of actual losses. Supreme Court held that delay in deployment of rigs resulted in a change of the actual production of gas by ONGC. The Apex Court held that in such contracts it would be difficult to prove exact loss and after finding that the compensation provided for in the contract was not unreasonable, the Court upheld the imposition of legislative damages by ONGC on Saw Pipes Ltd.

Section Editor: Pushpit Singh | 20 May 2020 11:46am IST

Tags : #liquidateddamages

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