Liquidated damages

Liquidated damages (손해배상액의 예정/損害賠償額 豫定) are referred to the damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach or belated performance by avoiding the difficulty in calculating the exact amount of damages.

At common law, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause). One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance. However, courts sitting in equity will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment of the enforcing party.

Example
In a construction contract, it is really difficult to estimate the amount of damages when the contractor delays to complete the projected work. So the employer usually sets in the clause of liquidated damages (지체상금/遲滯償金).

In some cases, courts have refused to enforce liquidated damages clause, choosing to follow the doctrine of concurrent delay, under the premise that where both parties to the contract caused delays to the overall project, or neither party can recover damages for that period of time when both parties were at fault. It occasionally occurs when both parties have contributed to the overall delay of the project.

In order for a liquidated damages clause to be upheld, two conditions must be met.
 * First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term.
 * Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.

Damages that are sufficiently uncertain may be referred to as unliquidated damages, and may be so categorized because they are not mathematically calculable or are subject to a contingency which makes the amount of damages uncertain.

Relevant Statutory provisions
Article 398 (Liquidated Damages) of the Civil Act
 * (1) The parties may determine in advance the amount of damages payable in the event of the npon-performance of an obligation.
 * (2) Where the amount of damages determined in advance is unduly excessive, the court may reduce the amount to a more reasonable and appropriate sum.
 * (3) The determination in advance of the amount of damages shall not affect the obligee's demand for performance or rescission of the contract.
 * (4) The agreement of a penalty is presumed to be determined in advance of the amount of damages.
 * (5) Even in a case where the parties have agreed beforhand that something other than money shall be applied as compensation for damages, the provisions of the preceding paragraphs shall apply mutais mutandis.