Liquidated Damages
Liquidated damages are a sum fixed in the contract in advance as the compensation payable for a specified breach, agreed so the parties need not prove actual loss.
In plain English
The clause substitutes a pre-agreed figure for the ordinary process of proving loss. Common in delivery-deadline and service-level contexts, typically expressed as a percentage of contract value per week of delay, subject to an overall ceiling. The classic legal question is whether the figure is a genuine pre-estimate of loss or an unenforceable penalty.
Why it matters
Liquidated damages give certainty to both sides — the claimant avoids a difficult proof exercise, the payer knows its maximum delay exposure. But an aggressive figure risks being read down, and an uncapped LD clause can exceed the contract’s profit margin.
Example
"If Supplier fails to achieve a Milestone by its due date, Supplier shall pay liquidated damages of 0.5% of the Milestone value per week of delay, up to a maximum of 10% of the Contract Price."
Under Indian law
Section 74 of the Indian Contract Act, 1872 provides that where a sum is named in the contract as payable on breach, the claimant is entitled to reasonable compensation not exceeding that amount. Indian law therefore does not draw the strict English penalty/liquidated-damages distinction — but the named sum operates as a ceiling, and reasonable compensation must still be shown.
How LexVio handles it
LexVio identifies liquidated damages clauses, checks whether they are capped, and flags rates that are unusual relative to the contract value.
LexVio — AI Contract ReviewCommon questions
Are liquidated damages enforceable in India?
Yes, subject to Section 74 of the Indian Contract Act, 1872. The named sum operates as a maximum, and courts award reasonable compensation up to that ceiling rather than automatically awarding the full stated figure.
What is the difference between liquidated damages and a penalty?
Under English law a penalty is unenforceable while a genuine pre-estimate of loss is not. Indian law under Section 74 avoids that binary and instead awards reasonable compensation not exceeding the stipulated sum.