LEGAL VIEWPOINT: Remedies for Breach of Contract – Liquidation & Consequential Damages

By Dr AbdelGadir Warsama, Legal Counsel

Asia 728x90

05.July 2023

Contracts denote the will of the contracting parties and valid contracts are enforceable by law. Based on this rule, each contractor shall perform his duties under the contract to the satisfaction of the other contracting party. Otherwise, there is legal liability for certain remedies to the injured party for breach of contract. Generally speaking, the purpose of the remedy is to put the injured party in the same position as if the contract has been performed. The balance here, of the same position, could be very difficult, however, this is the rule.

Legally speaking, the parties to a contract may provide their own remedies to be applied in case of non-performance. They can also limit either the remedies that the law makes available or the damages that can be recovered. If the parties agree on the amount of damages that will be paid to the injured party, this amount is known as “liquidated damages”.

An agreement between the contracting parties for liquidated damages, is enforced if the amount is reasonable and if the actual damages would be difficult to prove (a good example here, could be the amount for artistic work) in the event of breach of the contract. The amount is considered reasonable, if it is not so large as to be a penalty or so small as to be unconscionable. Therefore, if the amount is so large or so small, it will not be enforceable by Courts. However, if the liquidated damage clause is not enforceable because it is a penalty or unconscionable, the injured party can recover the actual damages that were suffered based on providing sufficient evidence.

In addition to the liquidated damages, there is another liability for “consequential damages”. The liability for consequential damages in normally resulting from a breach of contract, such as claim for lost profits or damage to property. This type of damages, may also be limited or excluded by agreement between the contracting parties.

The limitation of damages or exclusion is not enforced if it would be unconscionable. Any attempt to limit consequential damages for injury caused to a person by consumer goods is considered prima facie unconscionable. Suppose a car manufacturer makes a warranty to the quality of the cars, then they try to disclaim responsibility for any person injured if the car does not conform to the warranty and to limit its liability to replacing any defective parts. The disclaimer of consequential injuries in this case would be unconscionable and therefore would not be enforced.

Exclusion or limitation on consequential damages is permitted where the loss is commercial and, also, to apply as long as the exclusion or limitation is not unconscionable. 

Deeds are by their ends, however, sometimes the end may not be acceptable. Herein, non-performance of contracts is not acceptbale and entails compensation. The issue of damages for compensation, is very sensitive and it normally comes up at a late stage of non-performance.

Since allowable by law, it is advisable for the contracting parties to put and agree on clear provisions for damages, not containing very high or very low amounts. Doing so, will be very helpful to both parties in case of breach of the contract for non-performance and, moreover, will be enforceable by Courts.