Liquidated damages and penalty share a common feature that both are payable on the occurrence of a breach of contract. The parties to a contract may provide in advance the amount of compensation payable in the case of failure to perform the contract. The sum so fixed may be either liquidated damages or penalty
However, the main difference then is:-
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Liquidated Damages |
Penalty |
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Where the amount is fixed and genuine pre-estimate of the loss in cases of breach, it is liquidated damages. |
If the amount is fixed and is without any regard to probable loss, but is intended to frighten the party and to prevent him from committing breach it is a penalty and is not allowed. |