Liquidated Damages In Construction Contracts: What Are The Snags?

• Published date: 30 July 2023
• Subject Matter: Real Estate and Construction, Construction & Planning
• Law Firm: Herrington Carmichael
• Author: Mr Cesare McArdle and Katrina Banks

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...