#Liquidated Damages vs Penalty# By SN Panigrahi, Breach of Contract Occurs, Time is of Essence, Liquidated Damages, Penalty

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SN Panigrahi is a Versatile Practitioner, Strategist, Energetic Coach, Learning Enabler & Public Speaker.
He is an International-Corporate Trainer, Mentor & Author
He has diverse experience and expertise in Project Management, Contract
Management, Supply Chain Management, Procurement, Strategic
Sourcing, Global Sourcing, Logistics, Exports & Imports, Indirect Taxes –
GST etc.
He had done more than 150 Workshops on above
Published more than 500 Articles; More than 60 Youtube Presentations
He is an Engineer + MBA +PGD ISO 9000 / TQM with around 29 Yrs of
Experience
He is a certified PMP® from PMI (USA) and become PMI India
Champion
Also a Certified Lean Six Sigma Green Belt from Exemplar Global
Trained in COD for 31/2 Yrs. on Strategy & Leadership
GST Certified – MSME – Tech. Dev. Centre (Govt of India)
ZED Consultant – Certified by QCI – MSME (Govt of India)
Member Board of Studies, IIMM
Co-Chairman, Indirect Tax Committee, FTAPCCI
Empanelled Faculty in NI MSME
He has shared his domain expertise in various forums as a speaker & presented a number of papers in various national and
international public forums and received a number of awards for his writings and contribution to business thoughts.
SN Panigrahi
9652571117
snpanigrahi1963@gmail.com
Hyderabad

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When a breach of contract occurs, liquidated damages
and/or penalty is payable.
While the terms, penalty and liquidated damages might
sound similar, there is a clear line of distinction between
them.
Time is of the Essence: which means that the
performance by one party at the time specified in the
contract or within the period specified in the contract is
essential for one party in order to compel performance by
the other party.
As a consequence, failure to perform by the time specified
will be a material breach of the contract.

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Liquidated
Damages
Penalty
Breach of
Contract
Occurs
Time is of
Essence
Liquidated damages: If the amount fixed by all parties is
a genuine estimate of the loss by a future breach of
contract, then it is liquidated damages. Thus, all parties to
the contract agree that the amount is fair compensation
for the breach.
Penalty: If the amount fixed by all parties is unreasonable
or used to force the performing party to fulfill the
obligation, then it is a penalty. In such cases, the amount
is disregarded and the suffering party cannot claim more
than the actual loss.

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Liquidated Damages Penalty
Liquidated damages is the amount fixed by the parties on
the basis of probable loss to a party will suffer in case of
breach of contract like not meeting the completion
schedule or failure to perform etc.,
Penalty is an amount fixed by way of punishment and as
threat to a party for non performance or failure to meet the
contractual requirements.
Liquidated damages, are the true pre-estimate of the
damage.
The crux of the penalty is the payment of money
as a terrorem of the defaulting party.
In the common law jurisdictions, “liquidated damages” are
defined as "ex ante" reasonable estimation of the true
losses: the party suffering from the other party’s default
shall receive a predetermined indemnity
If the sum payable is far in excess of the probable damage
on breach of the contract, then it is a penalty.
unlike the liquidated damages, the penalty clause may
impose a sanction on the non performing party in
addition to the compensation. In other words, penalty
clauses may result in supra-compensatory sanctions, in
order to discourages possible breaches of contractual
obligations.
Liquidated damages shall fully compensate the non-
defaulting party from losses. Thus, they should include
subjective losses. However, liquidated damages will not be
enforceable if they are drafted using such a language
which will result punitive rather than compensatory.
If a contract mentions an amount payable at a certain date
and an additional amount if a default happens, then the
additional sum is a penalty. This is because a mere delay
in payment is unlikely to cause damage.

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7. Contact Details:
SN Panigrahi
9652571117
snpanigrahi1963@gmail.com 7