In relation to the law of contract, highlight five rules that the courts apply to distinguish liquidated damages from penalties. (10 marks)November 2022

The courts apply several rules to distinguish liquidated damages from penalties in relation to the law of contract. These include:

1. Genuine pre-estimate of loss: Liquidated damages are an estimated sum of money agreed upon by the parties as the amount of compensation that will be paid in the event of a breach of contract. If the amount is a genuine pre-estimate of the loss that is likely to be suffered as a result of a breach, it will be considered a liquidated damages clause.
2. Purpose of the clause: If the purpose of the clause is to compensate for a loss, it will be considered a liquidated damages clause. If the purpose is to deter the breaching party from breaching the contract, it will be considered a penalty.
3. Comparison with actual loss: The courts will compare the amount of liquidated damages to the actual loss suffered as a result of the breach. If the liquidated damages are disproportionate to the loss, it may be considered a penalty.
4. Unenforceable penalty: A clause that imposes a penalty is unenforceable and the court will not enforce it.
5. The clause should be reasonable: The clause should be reasonable in the sense that it should not be out of proportion to the harm or loss caused by the breach.