Streetwise Guide to Liquidated Damages
Streetwise Guide To Liquidated Damages
The General Position
In a perfect world every project would start and finish on time. In the real world some do, but an awful lot don’t. As you well know, Construction is a complex process; delays occur, disputes arise, variations are ordered and things don’t always go according to plan. Eventually the job is completed but well beyond the originally planned date and despite having been granted extensions of time the Contractor still fails to meet the new deadline which has been set.
He is now likely to face a financial liability, in the form of liquidated damages, for the time period from that new deadline to the date when he actually completes the project.
Late completion, due to default of the contractor, is a breach of contract; and like any other breach of contract it gives rise to a claim for damages. In general terms the financial measure of damages for any contractual breach is the amount which would restore the “injured” party to the position, so far as money can do it, to that which he would have been in had the breach not occurred.
In the absence of a provision for liquidated damages the claimant has to prove that a breach has occurred and to prove, also, his loss in monetary term. Such loss may be minimal or substantial depending on the consequences of the breach.
However, it is commonplace for the parties to a construction contract to decide beforehand a specific sum that shall be payable in the event of a breach; and in building contracts this is usually fixed in regard to late completion ie, in the form of a liquidated damages clause, stating the amount due for each day/week that the completion is late. In such event the sum specified becomes payable regardless of the actual financial loss that may have been occurred and without the need for the “injured” party to prove financial damage. This is the primary difference between general and liquidated damages for breach of contract.
There are a number of important points which are relevant:
- The term “liquidated” means a fixed or ascertainable sum. Very often the phrase, “liquidated and ascertained damages” (LADs) is used. Thus, a clause stating, for instance, “£2,500 per week for every week that the work remains incomplete” is fixed in value even though the total amount actually payable cannot be ascertained until the length of the delay is calculated.
- It follows that there must be a “start” date from which the delay (and therefore the amount due) can be assessed. In Main Contracts between the Employer and Contractor the “trigger” date is usually the date stated in the Architect’s Certificate of Non-Completion on which the works (taking account of extensions of time) should have been completed. The period from that date to the date of actual Practical Completion is the time period for determining the amount of liquidated damages payable.
- The sum inserted in a liquidated damages clause must be a genuine pre-estimate of the loss which is likely to be suffered if the contract is not completed on time. That pre-estimate is set before the contract works get under way. If the sum fixed beforehand is arbitrary or in the nature of a punitive amount and is therefore out of all proportion to the financial damage likely to be suffered, it may be challenged as being a penalty;
- The Courts will not lightly conclude that an amount agreed as liquidated damages by two contracting parties, who are both commercially astute and familiar with construction, is a penalty simply because the Contractor does not feel disposed, to pay the sum previously agreed because he now thinks it is too high.
So where do specialist sub-contractors stand in all this?
The standard forms of sub-contract do not contain liquidated damages clauses – and for good reason. If the main contractor is late, it may be due to his own fault and have nothing to do with the sub-contractor. If, however, the sub-contractor is late in completing the sub-contract works, and as a result he causes the Contractor to be late, the standard forms stipulate and the common law position is that the Contractor is entitled to recover such of his loss as is attributable to the sub-contractor.
The reason that most standard forms between Contractor and Sub-Contractor do not contain liquidated damages is simply this. If a Specialist Sub-Contractor delays the Contractor that that Sub-Contractor will become liable for a thick sandwich of costs!
This sandwich is made up of the Liquidated Damages, the Contractors own costs and any other costs that the Contractor incurs, such as those of all his other Sub-Contractors. See example (iv) below.
In non-standard sub-contracts, however, there may be liquidated damages clauses for delay in completing the sub-contract works; and the amount stated may in some cases be the same as or even more than those payable by the main contractor for delay in completing the works as a whole. In such cases the Specialist Sub-contractor could find himself paying monies (or having them deducted) as liquidated damages, even though the Contractor might finish on time, without being liable to the Employer for any liquidated damages.
Here are some examples of how liquidated damages might work out in practice
The Appendix entry in a standard form, indicating the amount of liquidated damages payable, is not filled in ie, no figure is stated. Liquidated damages do not therefore apply and the Employer can claim for his actual loss for late completion. Albeit that he now has to prove that loss.
The Appendix entry for liquidated damages states”£0”. A figure, albeit zero, has been inserted and this is not the same as example (i). Such a scenario has been held by the Courts to be a valid figure for liquidated damages. Thus, in this case, the Employer receives no liquidated damages for late completion; arguably he cannot make a claim for his actual loss suffered as general damages. He made an election for liquidated damages even though he stated that as “£0”.
An electrical contractor agrees to install a new lighting system in a school during summer holidays and to complete the work by early August, failing which he will pay the Local Education Authority £500 per week liquidated damages thereafter until actual completion.
He completes the contract some 3 weeks late at the end of August, this is still in time for the opening of the school term in September but he is still liable to pay three weeks worth of liquidated damages (£1500) even though he may protest that the LEA has suffered no actual loss, as the school was not inconvenienced by the delay.
A supermarket chain employs a contractor to complete a new supermarket by 6 May 2008 and the contractor provides for liquidated damages of £20,000 per week for each week that the project is late.
The Contractor does not complete nor does the supermarket open until 27 May 2008, some three weeks late. The delays are due to the Specialist Sub-Contractor who was responsible for the air conditioning. The contractors liability for liquidated damages is therefore 3 x 20,000 = £60,000.
However the contractor has his own costs for being on the site for an additional 3 weeks and as a result he receives claims from his other specialist sub-contractors.
The claim by the contractor against the air conditioning sub-contractor would therefore look like this:
3 x £20,000
Liquidated damages £60,000
Contractors Cost 3 x £8,000 £24,000
M&E Sub-contract claims £12,000
Total Claim £86,000
Need more information?
If you need more information or have a problem relating to Liquidated Damages or are having claims made against you for delay, please give Streetwise a call on: 01773 712116 or email: firstname.lastname@example.org