Difference between Liquidated and Unliquidated Damages

Liquidated damages and Unliquidated damages are the two kinds of damage. Liquidated damages are pre-agreed compensation for contract breaches, while Unliquidated damages are determined by courts after a breach. When a defendant breaches a contract, the damaged party is often awarded the amount necessary to put them back in the financial situation they were expecting. But the only thing that sets one type apart from the other is the method used to determine the amount payable.

Understanding the distinction between these two types of damages is crucial in contractual agreements and legal disputes.

What are Liquidated Damages?

Liquidated damages are those that result from a contract where the parties agree to pay a predetermined sum if any party fails to comply with the terms of the agreement. When the parties enter into the contract, that is, before the contract’s actual execution, they agree upon certain damages. Furthermore, once it is signed, this amount cannot be changed because it is fixed. Liquidated damages are governed under Section 74 of the Indian Contract Act 1872. A party that violates a contract owes the other party adequate recompense for the losses incurred by that party. It should be highlighted that in this case, the compensation must be an accurate pre-estimate of the loss. Both the complainant and the defendant are eligible to file claims in the case of liquidated damages under Section 74.

Key Features of Liquidated Damages:

• The Indian Contract Act 1872 addresses liquidated damages under Section 74.
• Liquidated damages are those that occur when the amount owed for a breach of contract is a true pre-estimate of the potential damages.
• When it comes to liquidated damages, the relevant question is whether the party experiencing the breach has to provide proof of real loss or harm in order to get the agreed-upon liquidated amount.

What are Unliquidated Damages?

Damages for a party’s violation that are not pre-estimated are known as Unliquidated damages. In short, unliquidated damages are the damages demanded for unforeseen losses. Any breach of contract without a liquidated damages provision is subject to these damages. However, because the money is unliquidated, it is challenging to determine how much compensation the plaintiff would want. Once the court or arbitral tribunals have examined the plaintiff’s real loss or harm resulting from the violation, they award these damages. Unliquidated damages are determined by the aggrieved party’s real loss or injury. There can be three types of Unliquidated damages; Substantial Damages, Nominal Damages and Exemplary Damages.

Key Features of Unliquidated Damages:

• Section 73 of the Indian Contract Act 1872 addresses real losses incurred as a result of a contract breach and the harm that led to the breach, which falls under the category of Unliquidated damages.
• Unliquidated damages must have three elements: the plaintiff’s burden of evidence, causation, and violation of contract.
• Compensation for any distant or indirect loss or harm resulting from a breach is not payable under unliquidated damages.

Difference between Liquidated and Unliquidated Damages

Basis	Liquidated Damages	Unliquidated Damages
Meaning	Liquidated damages are the pre-agreed damages that the party breaking the contract pays to the person who was wronged.	Unliquidated damages are those that are not pre-agreed upon, meaning that the court determines them after the contract has been broken.
Section	Covered under Section 74 of the Indian Contract Act, 1872.	Covered under Section 73 of the Indian Contract Act, 1872.
Proof of Loss	Under liquidated damages, there is no requirement for proof of loss on the plaintiff in order to make a valid claim.	Under unliquidated damages, proof of loss is a pre-requisite in order to make a valid claim, and the onus is on the plaintiff.
Amount of Damages	The amount of loss is not fixed under liquidated damages.	Under unliquidated damages, the amount of loss is not fixed, and the judiciary decides the appropriate amount.
Claim of Contract	In the event of a specific violation, the party that was wronged by the contract may get liquidated damages.	For unanticipated damages, claims are made for unliquidated damages.

Conclusion

When the person who was harmed has the ability to sue the other party for breach of contract, they will be awarded liquidated damages. In addition, the amount must be a true and accurate pre-estimate of the real damage brought on by the contract violation. Conversely, in cases when the parties cannot agree on a specific number, the court has the authority to determine the appropriate level of compensation. In such cases, unliquidated damages are granted.

Liquidated and Unliquidated Damages- FAQs

Which act provides provisions for Liquidated and Unliquidated damages?

The Indian Contract Act 1872 provides provisions regarding liquidated and unliquidated damages. Sections 73 and 74 of the act provide guidelines regarding liquidated and unliquidated damages.

What are Unliquidated damages?

Liquidated and Unliquidated damages are comparable. Both aim to make up for a party’s losses caused by a contract violation. Unlike liquidated damages, however, the amount of unliquidated damages is not stated in the contract.

When are Liquidated Damages enforceable?

Liquidated damages are enforceable when they are considered reasonable and proportionate to the potential losses that could result from a breach of contract. Courts may invalidate liquidated damages clauses if they are deemed to be penalties rather than genuine estimates of damages.

What is the advantage of using Liquidated damages in a contract?

One advantage of using liquidated damages in a contract is that they provide certainty and predictability to both parties in the event of a breach. By agreeing on a specific amount upfront, parties can avoid lengthy and costly legal disputes over the calculation of damages.

When would Unliquidated damages be preferred over Liquidated damages?

Unliquidated damages may be preferred in contracts where the potential losses resulting from a breach are difficult to predict or quantify in advance. In such cases, it may be more appropriate to allow a court or arbitrator to assess the actual damages based on the circumstances of the breach.

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