Parties to a Contract of Sale in Cyprus may specify themselves in their contract, the remedy available to the innocent party in the case of a breach by the other party. In general, contracts that involve money exchange and the promise of performance have a liquidated damages condition attached to the contract. The main reason for this stipulation is to establish a preset sum of money that must be paid if one of the parties fails to commit to promises and performance as agreed. If in any case your contract does not include such clause, the law is protecting the innocent party by filling the gap.
More than often the parties to the contract agreed from the beginning that in the case of a breach, the innocent party has the right to claim from the guilty party a specified amount of money. The amount of money paid to the innocent party can be specified by the court either as penalty or as liquidated damages.
Liquidated damages in a contract can only be considered as such when:
- the injury is either difficult to determine or uncertain
- the damages are considered and function as damages and not as penalty
- the amount is reasonable and sees that the actual harm caused by the contract breach.
If in any case the above criteria are not met, a liquidated damages clause can not be considered as valid.
The clause used to predefine the amount is enforceable provided that it does not exeed a sincere attempt to estimate a priori the loss which the innocent party would most likely suffer in the case of a breach regarding the questioned obligation. Failure to do so can result to classify the certain clause as penalty, yet a penalty not enforceable. This clause is enforceable regardless the loss that is actually suffered. However the purpose of predefining the sum of money in a contract is to facilitate recovery of damages without having to prove the actual damage.
Whether the amount of money specified in a contract is a penalty or liquidated damages, this is a question of law. The essence of a penalty is a payment of money specified as intimidation of the offending party. On the other hand the essence of liquidated damages is considered to be a pre-estimate of the damage.
To continue with the above question whether the amount specified acts as a penalty or liquidated damages is a matter to be decided upon the terms and circumstances of each particular contract and should be judged at the moment it is entered into the contract and not at the time of the breach.
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