Liquidated damages refer to a pre-determined amount of money that parties to a contract agree upon as compensation if one party breaches the contract. Instead of leaving the compensation open to negotiation or court decision after the breach occurs, the amount is fixed in advance within the contract itself. Here’s a clear breakdown: What Are Liquidated Damages? Agreed Sum: It’s a specific sum agreed upon by the parties at the time of entering into the contract. Compensation for Breach: It represents compensation for losses or damages caused by the breach, especially where actual losses may be difficult to quantify. Enforceable: If properly drafted and reasonable, liquidated damages are enforceable by courts and serve as the remedy for breach. Why Use Liquidated Damages? Certainty: Helps avoid lengthy litigation and disputes over the amount of damages. Predictability: Both parties know in advance what compensation will be payable in case of breach. Efficiency: Saves time and legal costs by fixing damages upfront. Key Features Pre-estimation of Loss: The amount must be a genuine pre-estimate of probable loss, not a penalty. Not a Penalty: If the amount is excessively high and meant to punish the breaching party, courts may refuse to enforce it. Applicability: Common in contracts involving construction delays, supply contracts, service level agreements, etc. Under Indian Law and Modern Frameworks (like BNS/BNSS) The concept of liquidated damages is recognized under contract law principles. Modern acts or frameworks might encourage clearer, fairer clauses for liquidated damages to reduce disputes. In newer business and commercial law systems like BNS or BNSS, there may be stricter scrutiny on whether liquidated damages are reasonable and justifiable. Courts and arbitrators tend to enforce liquidated damages clauses if they are proportional and reflect actual or estimated loss. Summary Liquidated damages are a pre-agreed amount of compensation in a contract for breach, aimed at providing certainty and avoiding disputes. It must represent a genuine estimate of loss, not an excessive penalty, and is enforceable under Indian contract law and contemporary legal frameworks.

Dear Client, A breach of contract happens when a party to the contract, without any lawful excuse, fails to do what was promised in the contract. After such a breach, the other party to the contract holds the right to claim reasonable compensation under Section 74 of the Indian Contract Act, 1872. This compensation must not exceed the amount that is mentioned in the contract. Liquidated damages are these mentioned and pre-agreed upon sums of money in the contract. The concept is that should one party breach the contract; the other party can claim these agreed-upon liquidated damages mentioned in the contract as compensation. However, courts have the power to lower the amount if it is excessive or not a genuine estimate of loss suffered by the aggrieved party because the very purpose of liquidated damages is to ensure fair compensation and it cannot be treated as a punishment for breach. I hope this answer helps. For any further queries, please do not hesitate to contact us. Thank you.