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When the parties to a contract agree to the payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things particularly mentioned in the agreement, the sum is called liquidated damages.
The amount of money specified in a contract to be awarded in the event that the agreement is violated. The fixed amount which a party to an agreement promises to pay to the other, in case he shall not fulfill some primary or principal engagement into which he has entered by the same agreement.
The damages will be considered as liquidated in the following cases:
When the damages are uncertain and not capable of being ascertained by any satisfactory or known rule
whether the uncertainty lies in the nature of the subject itself or in the particular circumstances of the case;
When, from the nature of the case and the tenor of the agreement, it is clear that the damages have been the subject of actual and fair calculation and adjustment between the parties.
It differ from a penalty which is a forfeiture from which the defaulting party can be relieved. An agreement for liquidated damages can only be when there is an engagement for the performance of certain acts that if not done would injure one of the parties or to guard against the performance of acts that would be injurious if done. In such cases an estimate of the damages may be made by a jury, or by a previous agreement between the parties who foresaw the consequences of a breach of the engagement and stipulated accordingly. The civil law generally agrees with these principles.
Generally the sum fixed upon will be considered either liquidated damages or a penalty according to the intent of the parties. The use of the words 'penalty,' 'forfeiture,' or 'liquidated damages,' will not be decisive of the question if the instrument, taken as a whole, discloses a different intent.
Rules have been adopted to ascertain whether the sum agreed upon is to be considered a penalty or liquidated damages.
It Has Been Treated As Penalty: 1. Where the parties in the agreement have expressly declared the sum intended as a forfeiture or a penalty, and no other intent can be collected from the instrument; 2. Where it is doubtful whether it was intended as a penalty or not, and a certain debt or damages less than the penalty is made payable on the face of the instrument; 3. Where the agreement was evidently made for the attainment of another object, to which the sum specified is wholly collateral; 4. Where the agreement contains several matters of different degrees of importance, and yet the sum named is payable for the breach of any, even the least; 5. Where the damages are capable of being certainly known and estimated.
It Has Been Considered As Liquidated Damages: 1. Where the damages are uncertain, and are not capable of being ascertained by any satisfactory and known rule; 2. Where, from the tenor of the agreement or the nature of the case, it appears that the parties have ascertained the amount of damages by fair calculation and adjustment.