The basis for liquidated damages

Contract law gives a right to claim general (or ‘unliquidated’) damages for breach of contract. This compensation is intended to compensate the injured party for loss, rather than to punish the wrongdoer. The general rule is that damages should (where possible) place the claimant in the same position as if the contract had been performed. However, any claimant will be subject to the common law rules on causation, remoteness, and a duty to mitigate its losses.

To address such uncertainty, contracts can provide for clauses calculating financial compensation payable by a party for failure to fulfil a primary obligation (such as completion of a project by a specific date). This compensation is known as ‘liquidated damages’ and is a secondary obligation in the contract.

The enforceability issue

However, there are a number of potential grounds for challenging the enforceability of a liquidated damages clause. Common issues include:

• Clauses that do not cover the breach in question.
• Uncertain – therefore void or invalid – clauses.
• Clauses that are considered a penalty.

Daragh Daly is an in-house solicitor for an Irish utility, and has lectured on the Society’s Diploma in In-house Practice. Writing for the Gazette, he discusses the best approach to drafting an effective liquidated damages clause.

• Read the full article in the December 2017 Gazette

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