The benefits of clauses that liquidate, stipulate, pre estimate or agree damages
Richard Manly SC (2012) 28 Building and Construction Law 246
A stipulation in a commercial contract which provides for the payment by the breaching party of a specific or ascertainable sum of money on failure by that party to perform or comply with a contractual provision is commonly referred to as a “liquidated damages clause”. The introduction of such a clause into a contract is generally regarded as a perfectly acceptable arrangement that will be enforced by the courts. The use of such a clause reflects the compensatory principles of damages and is an example of the parties deciding between themselves not only where the contractual risks should lie, but the extent of those risks.
The liquidated damages clause has been referred to by judges and academic commentators variously as an agreed remedy clause, an agreed damages clause, pactional damages, pre-estimated damages, a stipulated damages clause, a pre-estimated damages clause, adjustment of time costs, and a liquidated and ascertained damages clause. A demurrage provision in a charter party is a liquidated damages clause. In this article the term “liquidated damages clause” encapsulates all of these uses of the expression. This article considers the benefits that a liquidated damages clause can provide to contracting parties from practical, commercial and economics perspectives. It also reviews some of the case law and academic commentary that recognises these benefits. Further information can be downloaded: Download