A liquidated damages clause is included in a contract to pre-determine the amount of compensation payable in the event of a specific breach. Its primary commercial purpose is to provide certainty for both parties and to avoid the difficulty, expense, and time involved in proving the actual financial loss in court. By agreeing on a genuine pre-estimate of the likely damages upfront, the parties remove the potential for future arguments over the correct measure of damages, thereby simplifying the remedy process. This is particularly useful in situations where calculating the actual loss after a breach would be complex or speculative.

A. Other remedies for breach of contract exist, such as unliquidated damages (assessed by a court), specific performance, or injunction.

B. A liquidated damages clause must be a genuine pre-estimate of loss; if its purpose is to punish or deter a breach, it is deemed a penalty clause and is legally unenforceable.

D. The clause specifies the amount of compensation but does not guarantee the timing of payment, as the occurrence of the breach itself may still be disputed.

1. CIPS. (2018). Commercial Contracting L4M3 Study Guide. Profex Publishing Limited. Chapter 5

Section 5

'Damages'

pp. 138-139. The guide states

"The purpose of liquidated damages is to provide a pre-estimate of the loss that is likely to be suffered if there is a breach of contract... This avoids any argument about the amount of damages that should be paid."

2. University of London. (2022). Contract Law Study Guide (LA1040). Chapter 16: Damages for Breach of Contract

Section 16.4 'Liquidated damages and penalty clauses'. It explains that such clauses promote certainty and avoid the cost and difficulty of proving actual loss

stating

"The advantages of a liquidated damages clause are that it avoids the cost and difficulty of proving actual loss."

3. The legal principle distinguishing liquidated damages from penalties was established in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79. Lord Dunedin's speech clarified that the essence of liquidated damages is a "genuine covenanted pre-estimate of damage

" whereas the essence of a penalty is a payment "stipulated as in terrorem of the offending party." This directly refutes the notion that the clause is for penalising a supplier (Option B).