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Liquidated Damages and Penalty

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DC Cab
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For contractual points of view, what is the difference between Liquidated Damages(LD) and Penalty?




Trevor Rabey
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I am not a lawyer but I will have a go.
In Australia, and other places, penalties are generally un-enforcable. Courts don’t like enforcing what amounts to a fine. There is currently a strong argument that lots of "fines" such as for taking a DVD back to the Video shop late and even bank charges for insufficient funds etc are similar and similarly un-enforcable, mainly because they are un-related to the cost of the "offence".

Construction contracts often specifically state that the LDs are not a penalty, but are an agreed compensation assessed for an undetermined but must be realistic and reasonable damage caused to the client by late delivery of the project. Because lawyers know they aren’t enforcable.
Courts are much happier to compensate for damage so that the innocent party is in no worse position than before the damage. Even so, good luck trying to get the contractor to actually pay the LDs, especially if the project hasn’t finished yet.