D sold business to P. D was not to compete in city limits. If did D agreed to pay $10 000. D became shareholder in company that competed against P. P sues for liquidated damages of $10 000
Is it a penalty or is it liquidated damages?
If there are various breaches to which an indiscriminate sum is applied, and if it can be seen clearly that the loss in one particular breach could never amount to the sum stated then the conclusion that the sum is a penalty can be reached.
**Liquidated damages are enforceable however there is a presumption in favour of penalties, which are not recoverable.
Courts will not enforce penalties
*If the fixed sum is in excess of any actual damage which can possibly arise – then it is not a bona fide pre-estimate of the damage.
*When it is agreed to pay a fixed sum on the breach of a number of stipulations of various degrees - there is a presumption against the parties having pre-estimated the damages.
*When money is payable not on the happening of a single event but of one or more of a number of events – the court may decline to construe the words ‘liquidated damages’ and may treat such a sum as a penalty.
Court treated the sum as a penalty not liquidated damages
You will only really have liquidated damages when they are a fair estimate of the loss