In Australia, the definition of liquidated damages applies to the situations where upon the failure of a primary stipulation, imposes a detriment to the first party or a benefit to the second party by a secondary stipulation collateral to the primary stipulation (i.e. UK bank and credit card customers were being charged as much as £39 for a single transaction that took them over their credit limit.Consumers argued these charges were well beyond the cost of sending a computerised letter.High Court In the United States, Section 2-718(1) of the Uniform Commercial Code provides that, in contracts for the sale of goods: Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.A term fixing unreasonably large liquidated damages is void as a penalty.The liquidator represents the interests of all creditors.The liquidator supervises the liquidation, which involves collecting and realising the company's assets (turning them into cash), discharging the company's liabilities, and distributing any funds left over among the shareholders in accordance with the company's constitution (or the COMPANIES ACT 1993 if there is no constitution).
For example, suppose Neal Townsend agrees to lease a store-front to Richard Smith, from which Richard intends to sell jewelry.
If Townsend breaches the contract by refusing to lease the store-front at the appointed time, it will be difficult to determine what profits Smith will have lost because the success of newly created small businesses is highly uncertain.
This, therefore, would be an appropriate circumstance for Smith to insist upon a liquidated damages clause in case Townsend fails to perform.
In 2007 the Office of Fair Trading investigated the charges being imposed on customers of credit card companies.
In its report, the OFT claimed these charges were unlawful under UK law as they amounted to a penalty.
Stipulated damages create a secondary obligation for the purpose of enforcing the principal obligation.