Damages and liquidated damages under AB 04
There are two types of financial penalties for breach of contract: damages and liquidated damages.
Most people are probably familiar with the meaning of damages. Damages mean compensation for a harm that someone has caused. Sweden’s Tort Liability Act of 1972 governs compensation for damages arising from personal injury (e.g. broken bones) or property damage (e.g. broken windows) unless the parties agree otherwise. However, the Tort Liability Act does not regulate so-called pecuniary damage, which is economic loss that arises absent personal injury or property damage. Breach of contract usually results in pecuniary damage. Some contractual relationships are governed by other laws, such as the Sale of Goods Act and the Land Code. To the extent that a contractual relationship is not regulated by law, case law has developed models for calculating compensation for breach of contract. One such calculation model is the so-called positive contract interest, which means that the compensation should put the affected party in the same position as if the other party had not breached the contract.
The second financial penalty for breach of contract is liquidated damages. Unlike other damages, liquidated damages are not regulated by any law. If the parties want to have access to liquidated damages in the event of breach, they need to agree on it. It’s wise to include a liquidated damages clause when the damage caused by a breach of contract is difficult to quantify, such as a breach of non-competition or confidentiality clauses. However, since the damage in case of a breach of contract could exceed the amount of the penalty, it is common for the parties to write that the compensation should be equal to the amount of the penalty or, if higher, the actual damage.
AB 04, which is a standard contract often used in commercial construction projects, has provisions on damages and liquidated damages. Damages are limited to 15% of the contract sum unless the responsible party has insurance that covers a higher amount. AB 04, Chapter 5, Section 11. AB 04 stipulates a penalty in the form of liquidated damages for delay for each week or part thereof that the contractor exceeds the contract period. The amount of the penalty is regulated in the parties’ construction contract and is usually calculated as a percentage of the contract sum. Unlike general principles of contract law, where the parties can agree on liquidated damages or, if higher, damages, AB 04 provides that you cannot have both. According to AB 04, the client is not entitled to damages if the parties have agreed on liquidated damages. However, the parties may include in the contract that the client shall be entitled to liquidated damages and damages for breach of contract by the contractor.
