Doctrine of liquidated Damages in Contract Law

The liquidated damages clause is a remedy commonly used in commercial contracts for dealing with a breach of contract and allocating risks according to the parties' commercial intentions. Accordingly, each party may be entitled to a specific, agreed-upon amount of compensation if the other party breaches the contract. In both common law and civil law jurisdictions, liquidated damages are commonly used   

VIETNAM NATIONAL UNIVERSITY
INTERNATIONAL SCHOOL
**********
Business Law
Class section: INS201102
Lecturers: Đỗ Giang Nam
Topic: Doctrine of liquidated damages in contract law
Members
Name Student ID Contribution (%)
Nguyễn Đức Hiếu 20070468 100%
Ngô Thị Thanh Hiền 19071150 100%
Trần Thị Hiền 19071151 100%
Vũ Thị Hiền 20070467 100%
Trần Thị Hoa 19071155 100%
Lê Đình Hoàng 19071160 100%
Nguyễn Khánh Huyền 20070483 100%
Nguyễn Thị Khánh Huyền 19071167 100%

Part 1: Overview and concept of liquidated damages:
1. What are Liquidated Damages
A liquidated damages clause is a commonly used remedy in commercial contracts
to deal with a breach of contract and to allocate risks according to the parties’ commercial
intentions. Accordingly, a specific, agreed amount of compensation may be received by
one party for damages caused by the other party’s breach of contract.
A liquidated damages clause is widely used in both common law and civil law
jurisdictions around the world and in international treaties such as the UNIDROIT
Principles of International Commercial Contracts (PICC), the United Nations Convention
on Contracts for the International Sale of Goods 1980 (CISG).
2. When Is a Liquidated Damages Clause Enforceable?
To be enforceable, a liquidated damages clause should meet the following
criteria.
Damages are difficult to estimate. A court will be more likely to enforce a
liquidated damages provision if the damages that will be incurred as a result of a breach
of the contract are difficult to estimate when the contract is entered into. In certain
situations, injuries are easy to prove. For example, if a breach will result in the loss of
sales, it is easy to determine the actual damages by calculating lost profits. Others are
more difficult, like the harm caused by breach of a confidentiality agreement or theft of
trade secrets. To be enforceable, the damages should be either uncertain or difficult to
quantify at the time the contract is entered into.
The amount is reasonable and not a penalty. If the amount of the liquidated
damages is grossly disproportionate to the actual harm incurred, a court will likely find it
is a penalty or punishment and will not enforce the provision. When making this analysis,
courts usually consider what was reasonable at the time the contract was entered into as
opposed to when the breach occurred. There have been cases, however, where courts will
decide the reasonableness of the damage estimate based on the actual harm at the time of
the breach. This actual harm analysis is how the Uniform Commercial Code decides the
reasonableness of liquidated damages provisions in contracts for the sale of goods.
In the United States, Section 2-718(1) of the Uniform Commercial Code provides
that, in contracts for the sale of goods:
Damages for breach by either party may be liquidated in the agreement but only at
an amount which is reasonable in the light of the anticipated or actual harm caused by the
breach, the difficulties of proof of loss, and the inconvenience or non feasibility of

otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated
damages is void as a penalty.
REGULATIONS ON DAMAGES ACCORDING TO VIETNAMESE LAWS
Current Vietnamese laws, including both legislation and precedents, do not provide
a clear and proper concept of liquidated damages.
Civil transactions: Article 360 of Civil Code 2015 stipulates that In case there is
damage caused by breach of contractual obligation, the obligor must compensate for all
damage, unless otherwise agreed or otherwise provided by law. Thus, in civil
transactions, the liquidated damages clause is legal.
Commercial transactions: Article 302 of the Commercial Law stipulates that “The
value of damages covers the value of the actual and direct loss suffered by the aggrieved
party due to the breach of the breaching party and the direct profit which the aggrieved
party would have earned if such breach had not been committed.” Accordingly, this
provision shows that the aggrieved party is entitled to compensation and the amount of
compensation can only be actual direct loss and direct profit that would have been gained;
at the same time, the requesting party is obliged to prove the losses, the extent of the
losses and direct profit.
How to Set the Liquidated Damages Amount
To enforce the reasonableness of the amount of damages specified in such a clause,
courts look to what would have been considered reasonable when the contract was
formed, as opposed to when the breach actually took place. If the amount of liquidated
damages specified ends up being severely overestimated, compared to the actual harm
incurred, then the courts generally find the amount to be more of a punishment than an
estimate.
In this case, the courts would not enforce the liquidated damages clause. State laws
vary insofar as how liquidated damages clauses in contracts are to be executed, if at all.
Some states require that certain terms be incorporated into the clause in order for the
provision to be enforceable.
For instance, courts are more likely to analyze a car rental agreement in depth,
rather than a contract between two attorneys, due to the car rental company’s superior
bargaining power in the deal. What this means is that a car rental company can exert more
influence over a customer than can an attorney with credentials rivaling those of another
attorney. Therefore, it is more likely that the customer in this scenario would suffer
significant, unfair damages as a result of a breach of contract.

Part 2: Are all levels of agreement acceptable or is there a limit, the difference
of liquidated damages and the penalty:
1. The difference of liquidated damages and the penalty
a. Liquidated Damages and Penalty for Breach:
Penalty for Breach Liquidated Damages
is a predetermined sum to be paid by the breaching party to the innocent party
upon a particular breach of the contract
Instead of simply compensating
the innocent party, the penalty
clause punishes the breaching
party.
to compensate the innocent party for its
anticipated loss suffered due to the breach
without the need to go to court, not to
penalise the breaching party
b. Example of Liquidated Damages and Penalty Clause in a contract
There are two companies, Company A and Company B, entered into a
contract for the supply of certain IT hardware by Company A to Company B.
Liquidated damages in the contract might stipulate that in the event of a failure by
Company A to deliver the hardware to Company B by a specified date, that £15.00 is
payable for each day the delivery is late. Alternatively the amount could be a percentage
of the goods purchase price: 1% of the purchase price each day. Each would likely be
viewed as liquidated damages (depending on the facts of course!) as these payments are
not likely to be excessive.
However, a penalty clause in the contract might stipulate an excessive amount for
each week the delivery is late – for example, 200% of the purchase price will be payable
each week until the delivery is made, in order to punish the breaching party.
Conclusion, to ensure the clause is not a ‘penalty’ the sum should be an honest
reflection of the loss that Company B will likely face in the event of the delay. This could
include paying its contractors even though the project cannot yet be started, relocating
staff to other projects on short notice and paying their expenses, paying any late fees to
its own customer and so on.. The amount does not need to be exact, and in reality it rarely
is, however Company B must be able to show that they’ve given some genuine
consideration to the anticipated loss and the clause somewhat reflects this loss.
c. Three ways to determine if a clause is a penalty clause or a liquidated
damages clause
1. The obligation to pay such amount must be a secondary obligation:

The primary obligation is for Company A to deliver the IT Hardware to Company
B by a certain time, therefore meeting the terms agreed in the contract.
The secondary obligation is for Company A to pay to Company B a late payment
fee, in the event of a breach of the primary obligation. The obligation of paying for the
breach, is secondary to the obligation to meet the delivery date.
2. The innocent party must have a legitimate interest in the performance of
the contract:
Company A has contracted with Company B specifically for the supply of certain
IT Hardware, the parties have also pre-agreed a particular delivery date (or at least a last
possible delivery date) and Company B has most probably now made plans on the basis
that the goods will be delivered by that date.
Company B therefore has a legitimate interest in getting that IT hardware delivered
by the agreed date.
3. The sum must be proportionate and must not be excessive:
In a situation where the goods supplied are business critical. The supply of internet
or phone lines to a call center, it would be perfectly reasonable for a higher fee/percentage
to be applied as the consequences would be significant.
4. Are all levels of agreement acceptable or is there a limit
There is an agreement limit
A penalty clause is a contractual clause that imposes liquidated damages that are
unreasonably high and represent a punishment for breach, rather than a reasonable
forecast of damages for the harm that is caused by the breach, which are referred to as
penalty clauses. These clauses allow parties, at the time of contracting, to agree to their
respective damages liability if they later breach. While liquidated damages clauses are
generally enforceable, courts do not enforce penalty clauses.
“Liquidated damages”, a clause normally seen in an international contract, is not
specifically provided under Vietnamese law. As a general understanding, the amount of
the liquidated damages is determined by reference to an estimate of the likely loss
suffered by the non-defaulting party as a result of the breach. In other words, the amount
of damages is pre-agreed and does not depend on the non-defaulting party demonstrating
the amount of loss actually suffered.
On the other hand, Vietnamese law provides for two types of monetary remedies
for breach of contract, namely: (1) penalty for breach (phạt vi phạm); and (2)
compensation for damages (bồi thường thiệt hại). The parties to a commercial contract

under Vietnamese law may agree that (i) the defaulting party must pay only a penalty for
breach without having to compensate for damage, or (ii) the defaulting party must pay
both a penalty for breach and compensation for damage.
The Civil Code 2015 provides: “The penalty levels shall be agreed among the
parties, unless otherwise prescribed by relevant laws”. Thus, in principle, there is no
limitation on levels of penalties. Contracting parties are free to agree on the penalty levels
unless otherwise prescribed by specialized law.
In the United States, a liquidated damage clause is intended to estimate damages in
the event of non-performance or breach of contract. A liquidated damages clause will be
enforced where the court finds that the harm caused by the breach is difficult to estimate,
but where the amount of liquidated damages is reasonable compensation and not
disproportionate to the actual or anticipated damage. The intent of liquidated damages is
simply to measure damages that are hard to prove once incurred. If the liquidated damages
are disproportionate, they can, however, be declared a penalty. The clause is then void,
and recovery will be limited to the actual damage that results from the breach.
The treatment of liquidated damage clauses varies slightly among different
jurisdictions within the United States, but generally the courts consider two elements to
determine whether a liquidated damage clause is enforceable. The first is the uncertainty
element; whether the harm caused by the breach is difficult to calculate. The second
element is whether the amount of the liquidated damages is reasonable in proportion to
the actual or anticipated harm. If it is not, then it is a penalty, which is against public
policy, and therefore the clause is unenforceable.
The American approach to liquidated damages can be illustrated by both the
Uniform Commercial Code and the Restatement 2d Contracts:
Restatement 2d Contracts § 356:
(1) Damages for breach by either party may be liquidated in the agreement but only
at an amount that is reasonable in the light of the anticipated or actual loss caused by the
breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated
damages is unenforceable on grounds of public policy as a penalty.
UCC § 2-718:
(1) Damages for breach by either party may be liquidated in the agreement but only
at an amount which is reasonable in the light of the anticipated or actual harm caused by
the breach, the difficulties of proof of loss and the inconvenience or nonfeasibility of
otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated
damages is void as a penalty.

In civil law countries, the attitude toward contractual penalties is quite different
from the common law approach. The Napoleonic Code, upon which most civil codes are
based, allowed for penalties to encourage performance of contractual obligations. (This
is the precise rationale that is rejected in the United States.) In recent years, however,
there has been a widespread trend in civil law countries toward narrowing the scope of
such penalties, and allowing courts to reduce the amount if they find it excessive.
Penalty clauses in civil law jurisdictions can be described as the kind of liquidated
damages that would not be enforceable in the United States because of public policy
prohibiting liquidated damages designed to punish the nonperformer. Although penalty
clauses have been generally enforceable in civil law countries, they can now be mitigated
by the court in most jurisdictions. The Council of Europe issued a “Resolution on Penalty
Clauses” in 1971, with the aim of recommending a uniform application of penalty clauses
for the member states to use. The resolution allows penalty clauses, but the penalty
amount may be reduced by the courts if they are manifestly excessive, or if part of the
main contractual obligation of the contract has been performed.
The explanatory memorandum to the Resolution provides a list of factors in
determining whether a penalty is manifestly excessive. They include the comparison of
the pre-estimated damages to the actual harm; the legitimate interest of the parties,
including non- pecuniary interests of the promisee; what category of contract it is and
under what circumstances it was concluded, with emphasis on the relative social and
economic position of the parties; whether it was a standard-form contract; and whether
the breach was in good or bad faith.
Part 3: What is the legal value of estimated damages, and why are so many
people proposing to be a commercial remedy?
a, The value of liquidated damages
In Vietnam, the provision of liquidated damages under the agreement has not been
clearly stated in any legal documents. However, in some specific documents, it is still
possible to consider such as:
Civil transactions: Article 360 of the
2015 Civil Code stipulates that in case there is damage caused by a breach of an
obligation, the obligor must compensate for all damage, unless otherwise agreed or by
law. otherwise specified. Thus, in civil transactions, the damage compensation agreement
is effective.
Commercial transactions: Article 302, the 2005 Commercial Law stipulates that
the value of compensation for damage includes the value of actual and direct losses

suffered by the aggrieved party caused by the infringing party and direct profits. which
the aggrieved party would have been entitled to if there had been no breach. Accordingly,
the aggrieved party is entitled to compensation and the amount of compensation for
damage can only be the actual direct loss and the direct benefit that should be enjoyed; at
the same time, the requesting party is obliged to prove the loss, the extent of the loss and
the direct gain.
Thus, regulations on estimated damages are scattered throughout the system of
Vietnamese legal documents and in fact there have been many disputes related to
estimated damages in court that have not been recognized.
b. Why are so many people proposing to be a commercial remedy?
Sanctions are an indispensable element in the system of legal instruments
regulating business and commercial relations in order to ensure compliance with
commercial legal norms. Many proponents of becoming trade sanctions for
some reasons:
Firstly, trade sanctions encourage businesses to comply with a regulatory
framework of predefined regulations, procedures, standards and requirements and to
conduct commercial activities within that framework. When a contract in commercial
activities is legally entered into, there will be obligations that bind the parties to the
contract. The parties must properly perform the obligations in the contract. Any party
violating, that party must be responsible before the violated party in different forms of
sanctions.
Secondly, Trade sanctions have the potential to punish traders who fail to fulfill
their obligations. If legal norms create a legal framework including rules of conduct for
all organizations and individuals and are guaranteed to be implemented by the state, in
the case of organizations and individuals, it is beyond the legal framework. that is
violating the general rules of conduct, will be punished, suffer adverse consequences for
their actions.
Thirdly, Sanctions in trade help protect the legitimate rights and interests of the
parties in the commercial contractual relationship. If any party breaches the contract, that
party has the right to request the violating party to restore its legitimate rights and interests
or to compensate for damage caused by the breach of contract. This is the main purpose
of sanctions in trade because the commercial contractual relationship is established on the
basis of equality and mutual benefit of the parties
Finally, Commercial sanctions also aim to prevent and limit contract violations by
traders as well as those who have contractual relationships with them. Policyholders

anticipate the expected penalties or adverse consequences they will incur if they break
the law, thereby raising awareness of legal compliance, contract compliance, and
initiative. prevent violations.
So, The difficulty is that we have to find documents in the laws of other countries
and the laws of Vietnam do not clearly stipulate this issue, in addition, because of some
technical problems, my group had to edit the slide urgently to keep up with the
requirements present
Summary
Liquidated Damages is a commonly used remedy in commercial contracts to deal
with breach of contract and/or to distribute intended risk. While liquidated damages
provisions can have advantages, they are not always enforceable. If the predetermined
amount of damages ends up grossly disproportionate to the actual harm suffered, courts
will refuse to enforce the provision on the grounds that it is a penalty instead of an
estimate of actual damages.
References
(2022) Brewerlong.com. Available at: https://brewerlong.com/information/contract-
law/liquidated-damages-vs-penalty/ (Accessed: 1 June 2022).
Vietnam Law & Legal Forum (2022). Available at: https://vietnamlawmagazine.vn/
(Accessed: 1 June 2022).