Unliquidated Damages: Everything You Need to Know
Unliquidated damages are damages awarded as a result of a contract breach and they are determined through court proceedings and not predetermined in contracts.3 min read
2. How Do Unliquidated Damages Work
Updated October 26, 2020:
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.
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.
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