LIQUIDATED DAMAGES

A. Under English Law :

1.The term ‘Liquidated demand of money’ was defined in the case of Dr. Oladipo Maja v.
Mr. Costa Samouris (2002) 3 S.C. 37 at Page 12, Lines 15-30 by Iguh1as:

“It is a debt or other specific sum of money, due or payable and it’s amount must be
already ascertained or capable of it without any other or further investigation”

1.1 “Liquidated”- the amount which the plaintiff is entitled to can be calculated or
ascertained by calculation or fixed by any scales of charges or positive data

1.2 About a contract then parties must fix the amount payable on default or breach, like pre-
estimate of damage that would be incurred

1.3 when the amount to be recovered depends on all the circumstances of the case and the
conduct of the parties and is fixed by opinion or by an estimate or what may be judged
reasonable, the damages are said to be “unliquidated”

1.4 It also applies to sums expressively made payable as liquidated damages under a statute.

2. Cavendish Square Holdings BV v Talal El Makdessi2, Supreme court held that the
established test for determining whether a particular clause was a liquidated damages clause
or a penalty clause is that of a “genuine pre-estimate of loss” –formed part of a much broader
test.

2.1 The new test for a penalty clause is whether the contractual remedy for breach is out of
all proportion to the innocent party's legitimate interest in enforcing the counterparty's
obligations under the contract.

2.2 In circumstances where;

(i) the innocent party did not have a legitimate interest in ensuring performance; or
(ii) have a legitimate interest but the sums payable in the event of breach were found
to be extravagant or unacceptable in comparison to that interest,

then the clause would be classed as a liquidated damage clause and deemed unenforceable by
the English courts.

2.3 The “general test” is whether the relevant impugned clause is “a secondary
obligation which imposes a detriment on the contract-breaker out of all proportion to any
legitimate interest of the innocent party in the enforcement of the primary”

1
http://www.nigeria-law.org/LawReporting/2002/March 2002/1st March 2002/Dr. Oladipo Maja v Mr. Costa
Samouris.pdf

2
Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67
3. In the case of Triple Point Technology, Inc v PTT Public Company Ltd [2021]3 held that
unless the clause in question specifically provides to the contrary, liquidated damages will be
assessed up to the date of termination, even in circumstances where specific items of work
were never completed. 4

B.Under Indian law,

For a liquidated damages clause to be valid and enforceable, the following requirements must
be met:
(1) Case law has established that the stipulated sum of damages must be a genuine pre-
estimate of losses suffered by the party;
(2) The stipulated damages should be an effort to restore the affected party to the same
position as if the contract had been properly performed;
(3) Compensation may be stipulated for any loss reasonably foreseeable to the parties when
they enter into the contract. However, such stipulation should not relate to losses that are
remote or only indirectly related to the contract; and
(4) The claim for damages must be fair and reasonable. In addition, the sum of damages
agreed under the contract cannot be penal or punitive.

NOTE-

1.Where a liquidated damages clause is in operation, the contractual obligation that has been breached is
referred to as the primary obligation, and the payment obligation under the liquidated damages clause is called
the secondary obligation

2.English law doesn’t recognise the penaly clause i.e. liquidity damages, imposed by the relevant provisions is
disproportionately excessive in comparison with the legitimate interest of the innocent party (such as its
monetary loss and, where applicable, any wider legitimate interest) in enforcing those provisions.

3. THE “duty of mitigation” is a reference to the rule that requires the courts, in assessing the amount of
recoverable damages, to assume that the innocent party will have taken reasonable steps to reduce losses that
would otherwise have been caused by the relevant breach of contract. DOES NOT APPLY IN ENFORCEABLE
LIQUIDATED DAMAGES CLAUSEE.

4.The new penalty rule means that it is now much more difficult to challenge the enforceability of liquidated
damages clauses.

As regards the test of “wider interest”, it remains to be seen how the English courts will normally apply such a
test in practice.

3
Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29
4
para. 38.