Liquidated Damages: Friend Or Foe?

• Published date: 23 December 2022
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Corporate and Company Law, Contracts and Commercial Law, Construction & Planning
• Law Firm: Weightmans
• Author: Natalie Keyes

There have been significant decisions on liquidated damages in the last couple of years which we consider in this insight.

Liquidated damages, also sometimes referred to as ascertained damages, are a familiar feature to those dealing with construction contracts. There have been significant decisions on this topic in the last couple of years.

Why use liquidated damages?

Liquidated damages (LDs) are a fixed, pre-determined sum (usually a stipulated sum per day or per week), agreed between the parties to a contract to apply in the event of a breach of contract. LDs commonly apply in the event that the contractual dates for sectional completion and/or practical completion of works on a project are not met.

Having LDs agreed in advance means that each party knows where they stand on the question of loss if a breach occurs. The alternative to liquidated damages is that general damages might be claimed, which then requires the party claiming the loss to provide evidence and substantiation of the loss.

As it was succinctly put by the Supreme Court in the Triple Point case (discussed further below) LDs bring advantages to both parties:

"74. ........ First, establishing what financial loss delay has caused the employer would often be an intractable task capable of giving rise to costly disputes. Fixing in advance the damages payable for such delay avoids such difficulty and cost. Second, such a clause limits the contractor's exposure to liability of an otherwise unknown and open-ended kind, while at the same time giving the employer certainty about the amount that it will be entitled to recover as compensation. Each party is therefore better able to manage the risk of delay in the completion of the project."

Drafting liquidated damages clauses

Many standard form construction contracts, such as the NEC and JCT forms, are drafted to allow for the inclusion of LDs. Unlike the NEC form, the JCT form requires the employer to take additional steps before being able to offset or claim LDs. This includes service of a Non-Completion Notice and notice that the employer intends for the contractor to pay LDs or for them to be deducted. Both the NEC and JCT standard forms contracts, in the event that an extension of time is granted, allow for a repayment of the relevant proportion of LDs previously deducted.

LDs are usually interpreted as being an exclusive remedy for loss in the event of the relevant breach occurring. Careful consideration should therefore be given to the rate of LDs to be deducted and evidence kept of these considerations. Otherwise, if losses are subsequently considered to be greater than as set out in the relevant LDs provision, there may be no right to seek additional...