Ans.
Liquidated damages are pre-determined damages agreed at the time of contract,
which are considered reasonable by both the parties. It is a genuine estimate
of the actual loss or damage likely to be suffered by the aggrieved party.
I. RESCISSION OF THE CONTRACT
When there is a breach of contract by one party, the
other party may rescind the contract and need not perform his part of
obligations under the contract. This is called the right of rescission which
means a right to cancel or to set aside (i.e., reject) the contract.
II. SUIT FOR DAMAGES
Damages are the monetary compensation allowed by a court
of law to the aggrieved party for the loss or injury suffered by him. The loss
or injury suffered is known as damage. This is the difference between
"Damage” and “Damages".
III. SUIT
FOR SPECIFIC PERFORMANCE OF THE CONTRACT
There are cases where the damage or loss suffered cannot
be measured in terms of money. The court, may, in such cases where the ordinary
remedy by a claim for damages is not adequate compensation, direct the
defaulting party to perform the contract specifically. (Under Sec. 12. of the
Specific Relief Act, 1963). Specific performance is an order of the Court
directing the defendant to fulfil his obligations under the contract. Specific
performance is a discretionary remedy and is only available where damages are
not an adequate remedy.
IV. SUIT FOR AN
INJUNCTION
‘Injunction’ is an order of a court restraining a person
from doing a particular act. It is a mode of securing the specific performance
of the negative terms of the contract. To put it differently, where a party is
in breach of a negative term of the contract (i.e., where he is doing something
which he promised not to do), the court may, by issuing an injunction, restrain
him from doing what he promised not do so. Thus 'injunction' is a preventive
relief. It is particularly appropriate in case ‘anticipatory breach of
contract’ where damages would not be an adequate relief.
V. SUIT FOR QUANTUM
MERUIT
Quantum Meruit means 'as much as merits' or ‘as much as
deserves or earns'. In legal sense, it means ‘payment in proportion to the work
done'. In other words, quantum meruit means that a person can recover
compensation in proportion to the work done or service rendered by him.
Difference between liquidated damages and penalty:
Liquidated Damages and
Penalty
Liquidated Damages: Where the party fixes a genuine
pre-estimate of the probable damage, it is called liquidated damages.
Liquidated damages are pre-determined damages agreed at the time of contract,
which are considered reasonable by both the parties. It is a genuine estimate
of the actual loss or damage likely to be suffered by the aggrieved party.
Penalty: Where the sum fixed before-hand for
the breach of contract does not bear the relationship to the actual damage
which the aggrieved party is likely to suffer in the event of actual breach of
contract, it is called penalty. Such an amount acts as a deterrent from
committing a breach of contract.
A contract sometimes contains a clause in which a sum of
money is named as the amount payable in case of breach of contract. According
to English law, the amount of money payable is interpreted either as liquidated
damages or as a penalty. It is considered to be liquidated damages when the
amount is fixed by the parties on the basis of a reasonable estimate of the
probable actual loss which a party will suffer in case of breach. On the other
hand, the amount fixed is considered to be a penalty if it is not based upon a
reasonable calculation of actual loss but is fixed by way of punishment and as
a threat. A penalty will not be enforced by the Court.
In India, the distinction between liquidated damages and
penalty is not recognised. Sec. 74 of the Contract Act which deals with pre-determined
damages, lays down that if the parties have fixed what the damages will be, the
courts will never allow more. But the court may allow less. A decree is to be
passed only for reasonable compensation, not exceeding the sum named by the
parties. Thus, section 74 makes no distinction between a liquidated damages and
penalty and the aggrieved party is entitled to reasonable compensation not
exceeding the amount so named, regardless whether it is penalty or not.
Under section 73, the actual loss or damage has to be
proved but under section 74, the proof of actual loss or damage is not
essential.
The difference between
the liquidated damages and penalty depends on the facts and circumstances of
each case and the intention of the parties which is to be gathered from the
whole contract.
1. If the intention is to secure performance of the
contract by imposition of a fine or penalty, the sum specified is penalty; but
if on the other hand, the intention is to assess the damages for breach of
contract, it is liquidated damages.
2. Liquidated damages are the amount assessed on the
basis of actual or probable loss by both the parties. Penalty is not based on
actual or probable loss. Penalty is payable in the event of breach with a view
to prevent a party from committing breach.
3. Liquidated damages are imposed by way of compensation.
Penalty is imposed by way of punishment. The amount of penalty is exorbitant,
extravagant and unconscionable.
4. Courts in England usually allow liquidated damages
without any regard to the actual loss sustained and treat penalty clause as
invalid. But under the Indian law, section 74 of the Contract Act does not
recognize any difference between liquidated damages and penalty. The courts are
required to allow reasonable compensation so as to cover the actual loss
sustained, not exceeding the amount so mentioned in the contract.
