The Civil Code of Cambodia, which became effective in December 2011, provides significant latitude to the parties to a contract to negotiate the terms and conditions associated with termination of such a contract. In particular, Article 414 of the Civil Code allows the parties to agree on termination rights, as well as the methods and effects of termination. One of the effects of termination, available to the parties, is compensation in the form of liquidated damages.
Generally, “liquidated damages” refers to a pre-negotiated amount of monetary damages (money) to be paid by the party breaching a contract to the non-breaching party. The liquidated damages amount should be a reasonable estimate of the actual damages suffered by the non-breaching party as a result of the breach.
The liquidated damages provision of the Civil Code, Article 403, provides that the parties to a contract “may separately, and in advance, establish conditions for the payment of damages and an amount to be paid.” The liquidated damages may be incorporated as a clause in a contract when the parties to the contract agree to the payment of a certain sum as a fixed and agreed upon payment for the breach of the terms of such contract by way of non-performance, malicious intent or bad faith conduct, or any other special circumstances. A special agreement exempting the defaulting party from liability for intentional non-performance or non-performance resulting of gross negligence is deemed void. Moreover, a contractual clause providing for payment of liquidated damages does not preclude a claim for performance or termination of the contract.
It is important to note that the amount of liquidated damages must be an accurate representation of the losses anticipated to result from a breach by the other party to the contract. Under the Civil Code, a court can increase or decrease the amount of liquidated damages fixed by the parties, if such amount is grossly higher or grossly lower than the amount of damages actually suffered.
Further, where the terms of a contract provide for a penalty in the event of a breach, such penalty will be presumed to constitute liquidated damages. This means that a penalty for breach must be an accurate representation of the actual damages suffered, which may not be consistent with a typical understanding of a penalty.
Finally, a party suffering from a breach of the contract, by way of non-performance, must demand compensation for damages within five years of the occurrence of the breach.
by Caterina Mattioli – Legal Adviser
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