The Key Elements of Contractual Law

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Abstract

This paper seeks to describe some of the key elements of contractual law; liquidated damages and contractual penalties. It will further determine the effect contractual penalties have on contract freedom while explaining various opinions concerning whether contractual penalties play a role in curbing contract freedom.

Introduction

Various scholarly articles have given divergent opinions concerning liquidated damages as far as legal frameworks are concerned. As per Goetz & Scott (pg. 34, 1977), liquidated damages are described to essentially represent the fixed amount of money that is accrued to an individual as a mechanism of compensation in the event of breach of contract by another party. They are described to often take place due to failure of delivery of goods or various services within the agreed time between parties tied by a given contract. Some scholars have strongly asserted that the clause of liquidated damages does not project into the realm of fine or penalty. Some scholars have associated liquidated damages with the insurance for performance contract in that they stipulate the amount payable in case of breach of contract; some articles have described liquidated damages to be used to serve the purpose of protecting both parties that have entered in a contract. Additionally, liquidated damages are always a rational approximation of the tangible damages that may be incurred by any party in the event of breach of contract. Some other scholars have described liquidated damages to be fiscal reparation for impairment, injury, or loss to an individual’s rights or property, that is usually awarded by the court judgment or even stipulations in a contract concerning breach of the contract. On the other hand, contractual penalties have been described to be clauses in contracts that permit a particular party to charge an extra amount of money in the event that the other party’s failure to honor the terms of the contract (Gray pg. 45, 2013). Other scholars have also described contractual penalties to be applicable in the event that a contract specifies that in case of breach by either party involved, the party which breaches the contract pays an agreeable amount of monetary compensation which exceeds the pre-estimate loss likely to result from the breach. Contractual penalties, and to wider perspective, contractual laws have evolved to become integral components of relations in business as well as the daily discussions and implementation of agreements. More often, contracts which contain monetary exchange or assurance of performance bear the clause of liquidated damages.

According to Lindsay (pg. 23-24, 2016), the liquidated damages clause strives to resolve the conflict amid limiting reparation to the loss incurred by failure to honor the terms stipulated in a contract so as to protect the fragile parties and the belief of liberty of contract which provides the parties with the authority of determining the consequence of breach of contract. As explained by Goetz & Scott (pg. 56-67, 1977), the sum stipulated in the contractual penalty clause is considered a penalty in the event that the loss results from extravagant and unconscionable actions from one party. Additionally, it is presumed that the clause is regarded a contractual penalty in the event that a single lump is paid by compensation on occurrence of breach of contract or damage of property. As explained by various legal scholars, the clauses of liquidated damages are of vital commercial entities used by parties seeking to clarify the scope surrounding risks taken in contracts and to pave way for faster resolution of contractual disputes in the event of occurrence of such conflicts in the course of performance of obligations stipulated in the contract. In the recent past, debates on the effect of contractual penalties on contractual freedom have intensified. Various scholars have articulated their viewpoints regarding whether contractual penalties have played a role in curbing contractual freedom; nevertheless, it is conventionally agreed that contract law is meant to handle the consequences of failure to adhere to contractual terms as well as providing stipulations on the rational consequences of failure to perform obligations stipulated in a contract. Various legal researchers have identified various clauses which forbid the enforcement of contractual penalties which have been described to be anomalies in the contract law given the worldwide acceptance of the principle freedom of contracts as well as basic nature of contracts (Bell pg. 14, 2012).

Contractual penalties have not in any way curbed contractual freedom; instead, they have strengthened the need for responsibility and obligation to the terms specified in the contract. Most scholars have asserted that the doctrine of contractual penalties or rather the liquidated damages clauses must be viewed in the settings that, within boundaries, parties enjoy the liberty of contract i.e. parties engaging in the contract stipulate the terms of their contract without interference