Private Law Theory

ABSTRACT
The law on liquidated damages and penalties, in the words of Lord Neuberger and Lord Sumption, is ‘an ancient, haphazardly constructed edifice which has not weathered well’. Diplock LJ declared that he could make no attempt, where so many others have failed to rationalize this common law rule. This paper will look at the haphazardly constructed edifice of liquidated damages in India and despite Diplock’s warning, attempt to rationalize the rule on liquidated damages and penalties in India. This paper attempts to glean a jurisprudential basis of the non-enforcement of liquidated damages by examining the development of common law and analysing the law in various jurisdictions and concludes that (a) the lack of a consistent jurisprudential basis is the reason for the haphazardously constructed edifice, and (b) the jurisprudential basis for non-enforcement of liquidated damage provisions can only lie in the public policy against an enforcing an unconscionable bargain. Thus this paper proposes that the test that be applied to enforcing liquidated clause is that if the damages stipulated are excessively disproportionate in comparison with the maximum damages that could have been conceived at the time of making the contract, so as to constitute an unconscionable bargain, that the contractual stipulation for liquidated damages be reduced to make it reasonable.

Kapur, Diya and Trehan, Shyel, A Course Correction on Liquidated Damages in India (29 April 2024).