Negotiation around liquidated damages can be a crunch point for parties, as liquidated damages claims can represent a significant risk for contractors if there is a delay, while employers want to have the best remedy possible.
In this article we discuss the top considerations around liquidated damages clauses.
What are liquidated damages in construction contracts?
Liquidated damages are damages payable by a breaching party for a breach, such as failing to complete works within a specified time, and they are for a quantified amount or formula which is pre-determined by the parties during the negotiation of the construction contract. They are different to general damages, which aim to put the innocent party in the position they would have been in had the breach not happened. When claiming general damages, the innocent party has to demonstrate the loss it has suffered, whereas, this is not generally the case for liquidated damages, which usually become automatically payable on the occurrence of the relevant event (e.g. late completion).
Are liquidated damages the sole and exclusive remedy for construction contract breaches?
It's all in the construction of the clause. The liquidated damages clause should, when it's drafted properly, cover exactly the types of breaches to which a liquidated damages remedy should apply. It will only be in the event of those specific breaches that the liquidated damages remedy applies. This is why it is so important to get the negotiations right, whichever side of the construction contract you are part of, to be able to get the clause to be geared to your best interests.
It is also important to consider whether liquidated damages are the sole remedy in respect of the relevant breach or whether the employer is allowed to bring a further claim for any additional losses. It is often the case that liquidated damages clauses are considered to be a sole remedy and therefore if this is not the intention it should be stated in the contract. Either way, it is best for the position to be made clear in the contract.
An employer may try and argue that there is a difference between a delay caused by a breach of a requirement to complete the works by a certain time, and a delay caused by a breach of other obligations. But the court did not allow this in the case of Biffa Waste Services Ltd and another v Maschinenfabrik Ernst Hese GmbH and others [2008] EWHC 6 (TCC) because the liquidated damages clause was clearly composed as a complete remedy for delayed completion.
In another case, Temloc Ltd v Errill Properties Ltd [1987] 39 B.L.R. 30, because the parties had expressly said that the rate of liquidated damages was "£nil", the court still held that the liquidated damages clause was a sole and exhaustive remedy for the employer, and there was no entitlement for the employer to claim any damages whatsoever for late completion.
What if the original contractor fails to complete and a different contractor steps in to complete the works?
In the case of Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29 the Supreme Court held that liquidated damages do not accrue after termination with the first contractor. This ruling is important because before it, parties could still have accrued liquidated damages where another contractor was engaged after the first one, with the risk of the original contractor having to pay out liquidated damages when they were no longer engaged.
Is a liquidated damages clause a penalty?
The general law is that liquidated damages clause should not be a penalty. A contractor may try and argue that liquidated damages which are claimed by the employer are a penalty to try and void their claim. Under English law, contracts are designed to compensate for breaches rather than penalise the breacher, therefore, even when penalties are in contracts, they are unenforceable. Where there are liquidated damages clauses where the damages level is unconscionably high, they can be at risk of being unenforceable. Whilst the courts try not to intervene in contracts negotiated between businesses, it is nevertheless important to consider the losses likely to be suffered for late completion and base the liquidated damages on this in order to reduce the risk of the clause being unenforceable.
What is the importance of extension of time provisions?
Where liquidated damages are payable for late completion, the provisions dealing with extensions of time can be crucial and it is important to ensure you capture the intention and commercial arrangement. Things like what happens in relation to concurrent delays need to be considered in addition to single delays. However, it is important to note where there are no extension of time provisions, because in that scenario if the contractor is prevented from completing a timescale due to the employer, then the original completion date is likely to fall away, as does the liquidated damages provision.
Following the process
If you are a party are looking to claim liquidated damages, it is imperative that you follow the process set out in the contract, as failing to do so could result in you being unable to claim the damages. This includes giving the right notices, at the right time, to the right place. You may also need to serve a 'pay less' notice if you want to deduct them from a particular invoice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
