LEGAL PERSPECTIVE: Liquidated Damages by Dr AbdelGadir Warsama, Legal Council

Dr AbdelGadir Warsama, Legal Counsel

In business transactions, it is quite common for the parties to agree in advance for damages that will be payable in the event of a breach of contract. This case is known as “liquidated damages”. If there is no prior agreement as to the sum to be paid, the amount of damages is said to be “unliquidated damages”.

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It makes commercial common sense for the parties to establish at the outset of their relationship the financial consequences of failing to live up to their bargain. Provided the parties have made a genuine attempt to estimate their likely loss, the Courts the will accept the relevant figure as the damages payable. In practice, knowing the likely outcome of any legal action, the party at fault will simply pay up, without argument.

Of course, there is a temptation for any party with stronger bargaining power to try to impose a penalty clause, which is really designed as a threat to secure performance. Be careful, the distinction between liquidated damages and penalty clauses is not easy and Courts, in case of litigation, may take different understanding.

Regarding “unliquidated damages”, its aim is to put the injured party in the position he would have been-in if the contract had been carried out properly. Damages are designed to compensate for loss. If no loss has been suffered, the Court will only award nominal damages which is a small sum to make the fact that there had been a breach of contract.

In this respect Courts will observe general guidelines, such as, the damages can include sums for financial loss, damage to property, personal injuries and distress for being upset or otherwise. The injured party cannot necessarily recover damages for every kind of loss which he has suffered. There are certain principles to apply in cases of “remoteness” of damages. Also for Courts, provided the loss is not too remote, the next matter to consider is how much is payable by way of compensation to the damages.

How much to give as compensation, I believe, requires special attention and more mental effort from the Court to the extent of being able to give the most reasonable amounts that commensurate the damage. Many times, any compensation of high figure, will never replace the loss but wise just assessment is fully required to achieve justice for all parties.

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