Author: Sourish Saha, Research Associate
Damages are of two types, liquidated and unliquidated. Liquidated damages1may be defined as the amount of the damages has been ascertained by the judgment in the action or when a specific sum of money has been expressly stipulated by the parties to a bond or other contract as the amount of damages to be recovered by either party for a breach of the agreement by the other2. Unliquidated damages3are such as are not yet reduced to a certainty in respect of a sum, such damages limit the plaintiff’s right to recover damages or such as cannot be fixed by a mere mathematical calculation from ascertained data in the case4. If the liquidated damages clause for any reason is found not to be enforceable under law, the contractor will still be liable to the employer for unliquidated damages. The only exception to this rule is if the parties have previously agreed that no damages, will be payable for completion of the terms of contract, then there would be no damages.
Liquidated damages are also known as ascertained damages. They are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation or reimbursement upon a specific breach while discharging a contract be it frustration, or late performance for example. When damages are not predetermined, then the amount recoverable is said to be a general estimation of the damage incurred by the aggrieved party. Therefore, a court or tribunal in the event of breach specifically decides such an amount. The parties can alternatively agree upon the damages if there is an out-of-court settlement.
In common law principles, liquidated damages clause will not be enforced if its objective is to punish the wrongdoer rather than to compensate the party who has incurred damages. In such cases thereof, it is referred to a penal clause5. The justification for this is that the enforcement of the term would require an equitable order of specific performance. The courts ensuring equity will try to seek to achieve a fair result and will not enforce a term that will lead to the unfair benefit of the enforcing party. For an order of liquidated damages, the following two conditions must be met. Firstly, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term6. Secondly, the damages must be relatively vague at the time the contract is made that such a clause will likely save both parties in the future while estimating damages.
In 2007 the Office7of Fair Trading (OFT) investigated why credit card companies were excessively charging its customers. In its estimation, the OFT established that these excessive charges was unlawful under the law of United Kingdom and that these credit card companies were liable to be fined. The OFT said it would investigate any charge over 12 pounds though this was not intended to indicate that £12 is a fair and acceptable arrangement. It said it would be up to the court to determine such an amount based on the established legal precedent that the only recoverable cost would be actual costs incurred.
Unliquidated Damages in Tort and Contract Law
The concept of unliquidated damages appears in the law in both torts and contract law though the term is used most commonly in contract law. Indemnity that are sufficiently uncertain may be referred to as unliquidated damages and may be so categorized because they are not accurately calculable or are subject to a contingency which makes the amount of damages doubtful. Unliquidated damages refer to damages in a breach of contract case that were not predetermined by the party, for example in case of medical negligence. It can refer to any damages award a court awards in a breach of contract case based on the damages incurred. It can also refer to damages in a tort case that are left to the discretion of the judge such as damages for pain and suffering. Unliquidated damages are also awarded in cases of negligence, trespass, nuisance and vicarious liability. Anything which causes qualitative damage not ascertained by a fixed amount, it is the onus of the court or the adjudicating body to give unliquidated damages8.
Under the law in the US and in most locations, contracting parties can create their own private law by creating a contract with specific terms and conditions. Within the scope of the agreement, each party exchanges something of value with the other even if that something of value is just a promise to do something at a later date. The adjudicatory body will enforce the contract made by the parties and will penalize a person who breaches said contract. In general such damages cannot be set-off. Therefore, no interest will be allowed on unliquidated damages.
It is by now well-settled that “a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority9. The Court has also allowed “the writ petition holding that the claim that the Government has against the writ petitioner for breach of the terms of the surety agreement is only in the nature of a right to unliquidated dam-ages and so long as the sum recoverable by way of unliquidated damages remains undetermined it cannot be said that any amount is ‘due’ to the Government from the petitioner and hence steps cannot legally be initiated against him under the Revenue Recovery Act for recovery of the amount from the petitioner10. The Appellate Tribunal in another case also held that the nature of the liability under the arbitration award in the instant case is one for unliquidated damages ((Asuma Cashew’s case (I. .T. A. No, 249 (Coch) of 1982).))and that the liability to pay the damages became crystallised when the amount of damages is accepted either by negotiation or is determined by an arbitrator or by a court. The Appellate Tribunal Tribunal took the view in this case that it was not a case where the quantum of damages alone was referred to the arbitrator, but it was a case where the very question as to whether the assessee is liable to pay damages was referred to arbitration11. Therefore, unliquidated damages are given for more of arbitration proceedings where the nature of the contract cannot be boiled down to monetary terms at the time of entering into a proceeding/contract. Liquidated damages are easily verifiable at the time of entering the contract and sometimes also mentioned in the terms of the contract as a percentage or ratio of the total losses incurred.
- Defined in Smith v. Smith 4 Wend. (N.Y.) 470, Eakin v. Scott 70 Tex. 442, 7 S.W. 777 [↩]
- The Law Dictionary, http://thelawdictionary.org/liquidated-and-unliquidated-damages/, accessed June 2013 [↩]
- Cox v. Mclaughlin, 76 Cal. 60, 18 Pac. 100 [↩]
- Supra n. 2 [↩]
- “Liquidated damages, penalties and the Just Compensation rule: Some notes on an enforcement model and a theory of efficient breach”, Columbia Law Review, p 77 [↩]
- Supra n. 5 [↩]
- Office of Fair Trading v Abbey National plc and Others  UKSC 6 [↩]
- Michael Furmston, G.C. Cheshire and H.S. Fifoot, , Law of Contract, Oxford University Press, 15th edn, 2007 [↩]
- Union of India v. Raman Iron Foundry. AIR 1974 SC 1265 [↩]
- Vadakkel, J. in Universal Marine Agencies v. State of Kerala, 1977 Ker LT 949, Also see Commissioner of Income-tax, Kerala-I v. Nenmony Investments Agencies Ltd., 1978 Ker LN 11 [↩]
- Ibid. [↩]