Liquidated Damages
Contracting parties may agree on liquidated damages for breaches of an agreement. Contracts often provide for liquidated damages. Liquidated damages are compensation agreed in advance for breaches of the contract or defined provisions in it. Liquidated damages may also be used as a consequence of delay by agreeing that the penalty will increase in percentage terms, e.g. for every week delivery is delayed.
The advantage of liquidated damages is that there is neither a need to establish nor to prove the actual amount of loss. It is sufficient that a breach of contract has occurred.
The party’s obligation to pay liquidated damages is not based on any legislation but on the agreement between the parties. Consequently the agreement has to include a provision of liquidated damages, if the parties want to have liquidated damages as a consequence of breaches of an agreement.
The best preventative action is to set the level of liquidated damages high enough. A small amount of liquidated damages does not act as a deterrent to large companies. On the other hand, a large amount of liquidated damages may be impossible for a small company to pay.
If the amount of the loss exceeds the amount of the liquidated damages the other party may have a right to demand damages. The contract may also expressly provide for this. Likewise, the contract may provide that the liquidated damages constitute the only consequence of a breach of contract and therefore replaces damages.