Liquidated Damages in Contracts

Liquidated Damages in Contracts

Today, many individuals and entities conduct their activities through contractual arrangements. One of the fundamental requirements for entering into any contract is adherence to its terms and the proper performance of contractual obligations.

The importance of complying with contracts is such that specific provisions have been allocated to this subject within the Civil Code, and the legislator has provided for compensation in cases of non-performance of obligations.

One of the legal mechanisms used in contracts for this purpose is the provision of liquidated damages. In general terms, liquidated damages refer to an obligation undertaken or a commitment imposed on a party. In legal terminology, liquidated damages are contractual provisions intended to ensure the enforceability and proper execution of the contract.

Liquidated Damages

Contracts concluded between parties are legally binding and enforceable. Accordingly, the parties are obligated to perform their contractual commitments.

If one party fails to perform its obligation within the agreed time, it must pay a specified amount as compensation to the other party. In legal terms, this amount is referred to as liquidated damages.

Types of Liquidated Damages

A breach of contractual obligations by the obligor may occur in one of the following two forms:

• Complete non-performance of the obligation. In this case, the contract may specify a fixed amount as liquidated damages for non-performance, which is referred to as compensation for failure to perform the obligation.
• Delayed performance of the obligation. In this situation, the contract may provide for a daily amount as liquidated damages for each day of delay, which is referred to as compensation for delay in performance.

Determination of the Amount of Liquidated Damages

An important point is that the amount of liquidated damages is determined by mutual agreement of the parties, whereas compensation for delay in payment is determined by courts based on the official annual inflation index. It should be noted that the judge has no authority to modify the amount of liquidated damages stipulated in the contract.

Therefore, in the event of a breach, the obligor is required to pay the agreed amount of liquidated damages even if no actual damage has been incurred by the obligee.

Conditions for Claiming Liquidated Damages

The party claiming liquidated damages must have fully performed its own contractual obligations. A party that has failed to fulfill its commitments is not entitled to demand liquidated damages from the other party.

Force Majeure and Liquidated Damages

Liquidated damages may be claimed only when a breach of contract has occurred, and the damage is legally claimable.

• In obligations of means, liquidated damages may be claimed if the failure to exercise reasonable and customary efforts in performing the obligation is proven.
• In obligations of result, liquidated damages may be claimed unless the failure to perform resulted from force majeure. In the event of force majeure, liquidated damages are claimable only if the obligor has expressly guaranteed performance of the obligation.

Choice Between Performance of the Obligation and Payment of Liquidated Damages

Where liquidated damages are stipulated in a contract, the obligor generally does not have the option to choose between performing the principal obligation and paying liquidated damages.

The obligor is required to perform the principal obligation, and only if performance becomes impossible is the obligor required to pay liquidated damages.

However, if the parties expressly agree that payment of liquidated damages shall replace performance of the obligation, such an agreement shall be valid and enforceable. It should be noted that simultaneous performance of the obligation and collection of damages is not permitted, except in cases where the damages relate to a delay in performance.

Dependency of Liquidated Damages on the Principal Contract

Liquidated damages constitute a contractual condition intended to ensure a specific result. Upon breach of contract, the obligor becomes indebted and must pay the stipulated amount.

Liquidated damages are dependent on the principal contract. Therefore, in cases of rescission, nullity, or mutual termination of the contract, liquidated damages are generally not claimable. An exception applies only where the liquidated damages clause has been agreed upon as an independent obligation separate from the principal contract.

Difference Between a General Damages Clause and Liquidated Damages

Some legal terms may appear similar but have distinct legal implications. A general damages clause and a liquidated damages clause fall into this category.

In a general damages clause, the claimant must prove both breach of obligation and the occurrence of actual damage.

In contrast, under a liquidated damages clause, proof of actual damage is not required; establishing the breach of the obligation alone is sufficient.

Frequently Asked Questions About Liquidated Damages in Contracts