The pint of beer represents liquidated damages (yes, I know…!).
If things have gone wrong because of one party’s breach of the contract, the other party might be entitled to seek damages, to compensate them for any losses they’ve incurred. As you’ll see from the magic wand, there is a lot of work involved in proving exactly how much your loss amounts to, in order to get a Court to award you damages. In some cases, for example, for reputational damage or breach of confidentiality, it might actually be very hard to quantify the loss sustained, which makes it really challenging to claim damages for such breaches.
An alternative to seeking damages in the usual way is to make a pre-estimate of how much loss would be caused by a particular breach, and set out this amount in the contract. This concept is called ‘liquidated damages’.
The ‘liquidated’ element is so called because you have decided in advance how much a particular breach would cost you, and both parties have agreed that this would be a reasonable sum for the breaching party to pay in compensation if that breach were to occur.
You need to be careful when determining the amount of liquidated damages to ask for, as if the sum is unrealistically high with regard to the breach in question, it could be considered to be a penalty. Penalties are unenforceable under English law, which generally works on the basis of compensating the injured party, rather than punishing the breaching party.
So how do you work out what would be realistic? Do your best to think what the most likely consequences would be in response to a particular breach, and decide on a fair and justifiable sum. The better the rationale you can give for your calculation, the better.
In addition to taking away the pain of calculating the amount of actual damages, liquidated damages are much easier to secure payment for. The injured party needs only to prove that:
the other party has breached the contract; and
the liquidated damages clause is enforceable and should be enforced by the Court.
This is much more straightforward than seeking a general award for damages, and it is not necessary for the injured party to actually prove any loss at all.
Want to know more? Contact Devant for contract assistance!