Question

Which of the following is an example of liquidated damages and which is an example of limitation of damages and explain why?:

1) Gerald has agreed to purchase Reta’s home for $50,000. As part of the agreement, he must put down a deposit of $5,000. Both parties agree that if either of them does not follow the terms of the contract, the other person gets the $5,000 deposit. If Gerald fails to follow through with the purchase, Reta gets to keep the $5,000. If Reta decides she does not want to sell her home to Gerald, she must return the $5,000.

2) A developer, Markborough California, Inc., sued the consulting engineers who had designed a manmade lake for a housing project. The lake’s liner failed, leading to a $5 million claim against the engineer. The engineer asserted that, as specified in a clause in its contract with the developer, liability was limited to the amount of its fee — $67,640.

Answer 1

1.

It is an example of liquidated damage.

As per the liquidated damage condition, a contract has provisions to deliver the compensation if a breach of contract takes place. In this case, Gerald deposits $5000 and if he disagrees to buy in the future, then Reta will keep $5000 as a compensation for the breach of the contract. Or, she will return $5000 if she breaches the contract and does not sell. Hence, it makes the case of liquidated damage.

2.

It is an example of limitation of damage.

As per this limitation of the damage clause, the cap upon the damage claim is provided in the contract. In the given case also, damage claim from the engineer is also given a cap that is up to the services fee paid to the engineer as per the contract terms and conditions. So, it creates a case of limitation of damage.