Liquidated Damages are damages in the form of an amount that both parties agree to as compensation to the injured party in the event of a breach of contract. The clauses for Liquidated Damages are generally included in the contract and non-insertion of such a clause in the contract may render the injured party in a weak position in the event of a breach of the agreement.
In case of an import contract, the buyer may like to have liquidated claused for the delay in shipment or non-supply of material by the supplier. In the case of delay, the penalty on delay on a shipment is made in terms of USD per MT per day. More is the delay more is the penalty. However, to be legally correct, the buyer is also required to put a maximum number of days that may be allowed for the delay and after which the buyer has the right to terminate the contract and seek compensation from the supplier.
In this article, we will examine various facts on these penalties and their legal tenability.
Force Majeure and Liquidated Damages
Force Majeure conditions can help in avoiding Liquidated Damages. As soon as force Majeure conditions appear, the supplier must at least inform the buyer of its occurrence. In case, despite the occurrence of Force Majeure condition, Supplier fails to inform Buyer of its occurrence, the same cannot be entertained at a later date at the stage of legal argument.
Case Situation: Vessel while loading broke down and due to intervening holidays of X’mas and new year could not be repaired and was delayed. The supplier communicated the reason for the delay to the buyer, however, the Buyer claimed 3 days liquidated damages @USD 2 per MT for 19000 MT of grains. As per the contract, a letter from the Chamber of Commerce was required for claiming relief under Force Majeure. The supplier was not able to obtain this certificate as the situation though out of control of the supplier, was restricted only to their vessel.
What is your opinion on the above case ? In my opinion, on the production of documents from the port authority or master of the ship, relief should have been provided to the supplier. Blindly sticking to the Force Majeure clause by the buyer in their favor resulted in arbitration between the two parties, where they settled the case amicably. Force Majeure clause or any other clause cannot be complete in itself. They only provide intent to resolve disputes or provide general guidelines. What if, there would have been a Liquidation clause in the contract and no Force Majeure clause. In all such cases, the International court would have taken “intent” of the party and would have interpreted the law accordingly. I have seen in my career that in most of the cases, Shipping Lines get the benefit of any ambiguity as ships are machines and breakdowns cannot be predicted. The intention of the shipmaster was not to stop the ship and neither the intention of the supplier was to delay or not to supply. These parties have not gained anything from the delay and hence waiver should be provided in such cases.
Recovery of Losses for non-shipment
In the event of non-shipment, the Buyer has the right to claim for losses. Now let's take an example.
Case Situation: Supplier failed to Supply 1000 MT grain to the buyer as per the shipment schedule. The buyer claimed Liquidated Damages from the supplier by calculating the difference between the market price at the time of contractual arrival date and its purchase cost. Of course, the purchase cost (CIF) was below the market price at disport.
The above damages have been calculated and claimed on the assumption that the material would have been sold on the date of arrival. Thus, this loss is a notional loss and not the actual loss. The above claim of damages cannot be made and if made the same cannot sustain as per international Contract Law.
The claim for damages can only be made, if the actual purchase was done by the buyer at a price higher than the price of the initial purchase and the quantum of such loss can be different between the prices of two purchases.
For more on International Trade : Guide to Import Export for Beginners
No comments:
Post a Comment