Liquidated Damages: Contractual Ferocity or A Reciprocal Haven?

It is no secret that contracts are a vital part of our day to day lives, comprising and covering everything from the simplest transactions like buying your daily groceries to the most advanced acquisitions, multi-leveled constructions and projects, and with that in mind, there is always that tacky situation that always has the same tone and question to it and that is: what can warrant that the obligations stated/scope of the obligation mentioned in that contract is duly executed on time, and what shall happen in the case of late performance or non-performance of these said obligations,

That is why, at least in common practice, there is always a provision or more that regulates, late performance, typically in the form of the payment of a specified late fee or a certain remuneration or even specific performances, however, with the versatility and variety of scenarios that these practices may involve, it is vital that these practices do not reach the extent of usurpation or flagrant abuse, and so comes the regulations to try to strict and maintain the healthy and equivocal use of these practices in order.

In order to know more about such practices and their realistic implementation and implications that they carry throughout, we shall tackle the following contexts as follows:

1. The Definition of Liquidated Damages
2. Regulated use of such provisions and some respective applications
3. Liquidated vs Unliquidated Damages
4. Court Assertions and Rulings regarding liquidated damages
5. Summary

1. Definition of Liquidated Damages:

Liquidated Damages, according to the Egyptian Civil Law No. 131 of the year 1948, is defined as:  predetermined amount of compensation that a party agrees to pay in the event of a breach of contract, specifically for delay in the execution of works, at first glance, works can stand for certain performances required by the contract, however they can also be extended to payments or the nonperformance of specific actions that can be equivalent to/ or calibrated as a contractual obligation.

In addition, at Multiple Rulings, the court of cassation has redundantly emphasized the reasonable and proportionate nature of the liquidated damages clause, making it a mandatory requirement for the drafting of such provision and accordingly its respective execution.

In Comparative Law, liquidated damages refer to redetermined compensation agreed upon by contracting parties for a breach of contract, specifically when it comes to delays or failures in performance. The concept and enforcement of liquidated damages vary across different legal systems, as such in common law countries for instance  liquidated damages are enforceable if they represent a genuine pre-estimate of loss caused by the breach and are not punitive in nature, In civil law jurisdictions, they generally allow for liquidated damages but may have different approaches to penalties.

Additionally, on an international level specifically in contractual relationships, parties may choose the governing law that will determine the treatment of liquidated damages.

2. Regulated use of such provisions and some respective applications

Generally, Regulations always try and tackle such provisions with some sort of supervision, in application, there are 5 principles that usually govern this principle which can be summed up and summarized as follows:

1. Reasonableness: Liquidated damages must be a reasonable estimate of the actual damages that might be incurred due to a breach of contract. They should not be punitive or excessive compared to the harm caused.
2. Proportionality: The amount stipulated as liquidated damages should be proportional to the potential loss and not serve as a penalty.
3. A clear definition of what constitutes a breach: The contract must specify what actions or failures to act will trigger the liquidated damages clause.
4. Certainty and specificity: The contract should clearly state the number of liquidated damages or a formula for calculating the amount, providing certainty to both parties.

Enforceability: The clause must be enforceable under the applicable law, which generally requires that the liquidated damages are not considered a penalty

1. Liquidated vs Unliquidated Damages

Usually, On one Hand, the liquidated damages stand for contractual remedies that are implemented on contractual breaches that may happen throughout its tenure, on the other hand, the unliquidated damages are usually the results of a non-contractual transgression most likely due to a tortious act,

As such the main differences between both of the above-said terms can be summarized in the following table:

As such, it is apparent that Liquidated Damages are clearly the Go-To for contracts and the damages that result of its implementation or interpretation thereof, however it is not only limited to them for damages that may happen throughout the execution of these contracts, as damages may vary from liquidated to unliquidated dependent on the Cause , Damages Incurred  and Causation Relationship.

1. Court Assertions and Rulings regarding liquidated damages

National Jurisdiction Applications

Over the years, Egyptian Courts have emphasized the nature and constraints involving the liquidated damages clause, ensuring its fair and impartial/proportionate application between the contracting parties, all in accordance and conformity with the provisions of Civil Law no. 131 of the year 1948 and in particular Articles 224-226.

Here are some examples regarding the Egyptian Court of Cassation rulings pertaining to this matter:

1. Appellate No. 743 for the year 49 J:

This ruling sets forth some important principles surrounding the liquidated damages, for example:

1. Principle No. 4:

Whenever there is a liquidated damages clause existent in the contract, there is no proof needed to be established by the creditor upon the occurrence of the breach, if the debtor wishes to counter the occurrence or happening of that breach, then he has to counterproof the transpiration of that material act that led to the breach.

1. Principle No. 6:

It is stated that the non-performance of the debtor to his corroborated contractual obligations already construes a default that requires the invocation of the Liquidated Damages Clause without any external proof that is required by the creditor.

2. Appellate No. 4141 for the year 83 J:

This ruling, as its predecessor sets forth an important principle surrounding the liquidated damages, for example:

The Liquidated Damages Clause, in its origin, is considered to be a subsequential obligation derived from the original contractual obligation of performance