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Does penalty refer to a situation when the liquidated damages (provisions for damages) in the contract in the event that one party breaches the contract, is deemed not to have been a genuine attempt to pre-estimate the damages?
So is penalty a failed attempt at liquidating damages?
Thank you sir.
Not quite. The reason that the liquidated damages clause fails is because the Court decides that the estimate of the potential damages is not a genuine estimate of the damage that will be suffered in the event of breach.
In other words, it could be based on a genuine attempt but then that genuine attempt is inflated
So any amount that the Court believes is in excess of a genuine attempt of potential damage in the event of breach must be an amount representing a penalty … and the Court says that it’s not up to contracting parties to fix the level of penalties – that’s the Court’s job
Now, if that’s what you meant in your post then, yes, you are correct. But my interpretation of your post suggested just a slight difference in emphasis / direction
OK?
So if a penalty is the excess of the potential damage, i.e too much compensation or provision for the expected damage of one party breaching the contract, then what exactly does the penalty that the court decides function as?
Does the court give additional penalties (compensation rewards) if they seem that there is an under-provision of damages in the contracts?
Thank you sir,
No – what the Court is objecting to is the idea that the “innocent’ party (ie the non-breacher) should be taking it upon themselves to try to work in a penalty amount – that’s the job of the Court
In fact, where the Court decides that some of the agreed liquidated damages sum constitutes a penalty, it’s most probable that the Court will negate the liquidated damages clause in its entirety
It has to be a genuine pre-contractual estimate of the damage that is likely to be suffered int he event of breach
Don’t forget that an award of damages is made in order to compensate the victim. It’s NOT intended as a punishment
1. So the genuinely pre-estimated damages likely to be incurred if one party breaches the contract is for compensation purposes.
2. Therefore, if the pre-estimated damages have been inflated it is a penalty amount because it would be an amount beyond putting it back to the state they were in before the breach of the contract?Therefore..
3. a penalty refers to the fact that the genuinely attempt to pre-estimate damages was inflated in the eyes of the court, and therefore the court will usually negate (exclude?) the liquidated damages clause in entirety?
Is this thinking process correct?
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