Key Takeaways

  • Unliquidated damages are not pre-agreed in a contract and are assessed by a court based on actual loss.
  • These damages are awarded when loss results naturally from a contract breach and cannot be predetermined.
  • They are especially common in construction and commercial contracts when losses are difficult to estimate beforehand.
  • Courts require claimants to prove their loss was foreseeable, not remote, and to mitigate damages.
  • Unlike liquidated damages, unliquidated damages are assessed post-breach through litigation.

Unliquidated damages are a type of damages awarded as a result of a contract breach. They differ from other forms of damages in that they are determined through court proceedings and not predetermined in contracts. The main purpose of unliquidated damages is that they enable a party suffering from a breach of contract to claim compensation for unforeseen losses. However, certain requirements must be met before such damages are awarded. Unliquidated damages are commonly included as a provision in construction and engineering contracts.

What Are Unliquidated Damages?

Unliquidated damages are a type of compensation that is considered “at large,” meaning that the amount is not stated when a contract is established. Instead, these damages are determined by a judge or jury in a court following a breach. The amount of unliquidated damages that a plaintiff is entitled to cannot be ascertained through a mathematical calculation or formula. The only thing that is established is the plaintiff's right to claim compensation.

It is beneficial to include a provision for unliquidated damages in a contract because it allows the client to recover losses that were difficult to estimate or foresee before the contract was breached. The disadvantage of having such a provision is that it obligates the client to prove his or her actual losses when a breach occurs, which can be a complicated process. It also means that the contractor will have an unknown liability. The client is required to prove that losses are not “remote” but a natural result of the contract breach.

In a standard construction contract, parties may insert “N/A” or “NIL” for the amount of liquidated damages if they prefer not to claim such damages. However, this may imply that unliquidated damages are also not applicable. Parties that wish to exclude liquidated damages should clearly state their intentions in the contract in order to avoid ambiguity or dispute. They can either delete the clause or state that unliquidated damages apply.

Unliquidated vs. Liquidated Damages

Unliquidated damages differ significantly from liquidated damages. While unliquidated damages are assessed after a breach occurs based on actual loss, liquidated damages are a pre-agreed sum written into a contract to cover specific breaches, such as project delays.

If a contract includes a liquidated damages clause, the affected party does not need to prove the extent of the actual loss—they are automatically entitled to the stipulated amount. Conversely, if no such clause exists or if the clause is found unenforceable, unliquidated damages may be pursued instead.

This distinction is critical because courts will not award both types of damages simultaneously. If a liquidated damages clause is invalid or unreasonable, courts may strike it down and award unliquidated damages instead.

How Do Unliquidated Damages Work

In the construction and engineering industries, people are usually concerned with liquidated damages but unliquidated damages are seldom mentioned. Unliquidated damages refer to damages that are claimed for an unforeseen loss. They apply to any breach of contract that does not contain a liquidated damages clause. Such damages are the most common form of relief awarded for breach of contract. Nonetheless, since the amount is “unliquidated,” it can be difficult to know how much compensation the plaintiff can claim for a breach.

When it comes to awarding unliquidated damages for a contract breach, the court uses a compensatory approach. It attempts to:

  • Restore the loss sustained by the plaintiff
  • Return the plaintiff to the position it had before the breach
  • Avoid penalizing the defendant
  • Avoid improving the plaintiff's position beyond where it would have been if the breach did not occur

To determine the amount to be awarded, the court will take into consideration the proven losses of the plaintiff, including loss of profit. However, such losses must have been a natural consequence of the contract breach.

Additionally, the type of loss and the extent of it must have been foreseeable before the parties signed the contract. While it is not necessary for the loss to be foreseen, it must be foreseeable. If one party has contemplated a specific or unusual loss before entering into an agreement, it should mention it in the contract to avoid a dispute and increase the chances of recovery.

The plaintiff is also responsible for mitigating the losses it can potentially sustain as a result of a contract breach. It cannot just sit back and let the losses accrue if they can be reduced or prevented by an ordinary person or party's reasonable efforts. In the event that the plaintiff did not take measures to mitigate the losses even though they are available, the court will award compensation that will be commensurate with what it should have been if the measures were taken.

Another point worth mentioning is that the court may award damages for moral losses. Nevertheless, it can be difficult to calculate and prove how much moral loss a party has sustained.

Key Legal Principles in Awarding Unliquidated Damages

To successfully claim unliquidated damages, several legal principles must be satisfied:

  • Causation: The breach must directly result in the claimed loss.
  • Remoteness: Only losses that arise naturally from the breach or were within the parties' contemplation at the time of contracting are recoverable.
  • Mitigation: The claimant must take reasonable steps to minimize their losses.
  • Proof: Losses must be supported by credible evidence, such as financial statements, invoices, or expert testimony.

Courts will not compensate for speculative or exaggerated claims. Damages must be quantifiable even if they are not predetermined.

Common Scenarios for Unliquidated Damages

Unliquidated damages are often claimed in the following scenarios:

  • Construction Delays Without a Liquidated Damages Clause: Where a contractor's delay causes economic loss to a project owner.
  • Professional Negligence: When service providers fail to meet contractual standards, resulting in unanticipated business losses.
  • Supply Chain Disruptions: A supplier’s failure to deliver goods on time causing business interruption and loss of profit.
  • Employment Disputes: Breaches of employment contracts leading to financial harm.

In each case, the claimant must present sufficient documentation to justify the extent of the financial damage.

Legal Limits and Enforceability

Although unliquidated damages are assessed after the fact, there are boundaries:

  • No Double Recovery: A claimant cannot recover more than what was lost.
  • No Windfall Profits: Damages aim to compensate, not penalize or enrich.
  • Judicial Discretion: The court exercises judgment in determining reasonable compensation based on the specific facts of the case.

Courts may also refuse to award unliquidated damages if the loss is too uncertain or if the claimant fails to meet the evidentiary burden.

Frequently Asked Questions

  1. What is the difference between unliquidated and liquidated damages?
    Liquidated damages are predetermined sums written into a contract, while unliquidated damages are determined by a court after a breach based on actual loss.
  2. Can a party claim both liquidated and unliquidated damages?
    Generally, no. If a liquidated damages clause is enforceable, it excludes unliquidated damages for the same breach. However, if the clause is invalid, unliquidated damages may be pursued.
  3. Are unliquidated damages harder to claim?
    Yes, they typically require the claimant to provide substantial evidence of loss and prove that the loss was foreseeable and directly caused by the breach.
  4. What types of losses qualify for unliquidated damages?
    Losses such as lost profits, additional costs incurred due to delays, or business disruption may qualify, provided they meet legal standards of foreseeability and causation.
  5. Do unliquidated damages apply only in construction contracts?
    No, they can apply in any contractual context where losses occur without a liquidated damages clause, including commercial, employment, and service contracts.

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