Which of the following hold true in case of liquidated damages?
A)For liquidated damages to be lawful, the actual damages must be precisely determined.
B)Liquidated damages are enforceable even if actual damages are later determined to be different.
C)A liquidated damages clause is considered a penalty if actual damages are not determinable in advance.
D)If a liquidated damages clause is found to be a penalty, it continues to be enforceable.

Question

Quizplus · Accepted Answer

Liquidated damages are a pre-agreed amount of damages that are specified in a contract as the amount of compensation that one party will pay to the other party in case of a breach of contract. In order for liquidated damages to be lawful, the amount of actual damages must be difficult to determine precisely at the time of contract formation. In case of a breach of contract, the actual damages suffered by the non-breaching party may be difficult to determine with exactitude, and thus the pre-agreed amount of liquidated damages provides certainty and predictability for both parties.

Under the law, if a liquidated damages clause is found to be excessive in relation to the actual harm suffered by the non-breaching party, it may be considered a penalty and be unenforceable. However, if the liquidated damages are a genuine pre-estimate of the loss, then they are enforceable even if the actual loss turns out to be different. Therefore, option B is the correct answer. Option A may be true in some cases, but it is not a necessary condition for the lawfulness of liquidated damages. Option C and D are incorrect because they misstate the law on liquidated damages.

Which of the Following Hold True in Case of Liquidated