When might your liquidated damages provisions not apply?

25 January, 2018

Including a provision for liquidated damages in a building contract in order to allow an employer to claim damages at a certain rate for the contractor failing to complete project on time is a good starting point. There are, however, issues that can arise in enforcing such liquidated damages provisions. A few such issues are highlighted below:

Is the payment too high?

One issue is whether the amount/rate that the employer can withhold or deduct for liquidated damages is too high. The position used to be that the liquidated damages rate must be a genuine pre-estimate of loss. Following a Supreme Court decision in 20151, which we have discussed previously, the law has become more nuanced and considering whether a liquidated damages payment is a genuine pre-estimate of loss is no longer the key point to consider.

Contractors now face a tougher task in persuading a court that an agreed liquidated damages clause is unenforceable. What we must now look at is whether the payment is “exorbitant or unconscionable” and in considering that, in a liquidated damages context, you can look at the employer’s legitimate interest in ensuring that the target completion date is met.

Has time become at large?

A building contract should generally also include a provision confirming the process for extending the completion date due to delays caused by the employer. That is because of the risk of time becoming at large if you restrict the ability for any extensions of time if a delay event occurs that is the employer’s fault but the contract did not make provision for that delay.

If time becomes at large any agreed completion date would fall away and the liquidated damages provisions would not kick in as there is no completion date to start from.

Have you agreed something that ends your right to liquidated damages?

A recent case2 looked at the recovery of liquidated damages after the parties amended their contract by a “memorandum of understanding”. The memorandum of understanding did not expressly deal with liquidated damages nor set a new completion date. It instead included a duty on the performing party to use its “fullest endeavours” to complete its works by a specified date. That meant the performing party could possibly comply with its duty and still not complete by the specified date. This meant that liability for liquidated damages fell away as the obligation in the original contract had been replaced with something else. In the opinion of the judge, delay damages would now only arise, in these particular circumstances, should the performing party fail to use its “fullest endeavours”.

Accordingly employers and their representatives should take care when drafting their contract to ensure that the liquidated damages provisions are enforceable and should also be mindful when making any supplemental agreement with the contractor to not replace those obligations with anything else that means that liability for liquidated damages falls away.

1 Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67
2 HSM Offshore BV v Aker Offshore Partner Ltd [2017] EWHC 2979 (TCC)