Hidden hurdles of liquidated damages

Words:
Douglas Wass

Time and procedure are critical in any claim for liquidated damages

Most construction contracts require the contractor to pay the employer liquidated damages if the contractor either fails to complete the works by the set date or is not entitled to an extension of time.

However, the employer’s right to claim liquidated damages usually also depends on certain notices being served on the contractor within timescales specified in the contract. The employer will often rely on the architect who acts as its contract administrator or agent to either issue the notices or advise it to do so.

For example, under the JCT Standard Building Contract the employer must do certain things before it can claim liquidated damages.

The contract administrator must have issued a non-completion certificate confirming that the works have not been completed by the completion date. The employer must also have notified the contractor before the date of the final certificate that ‘he may require payment of, or may withhold or deduct, liquidated damages’. He must also have notified the contractor, no less than five days before the final date for payment of the last installment under the contract, of two things. First, that for the period between the completion date and practical completion of the works, he requires the contractor to pay liquidated damages at the rate stated in the contract, or a lesser rate stated in the notice; and/or secondly, that he will withhold or deduct liquidated damages at the rate stated in the contract, or at such lesser stated rate, from sums due to the contractor.

In addition, if the employer wishes to deduct liquidated damages from sums due in an interim or final payment, it must serve a pay less notice on the contractor at least five days before the final date for payment. The notice should set out the sum, if any, that the employer intends to pay (even if it is zero) and how that has been calculated by reference to deductions for liquidated damages.

If a time extension is granted at any point after a non-completion certificate has been issued, a new certificate must be issued before the employer can claim liquidated damages

Importantly, if a time extension is granted at any point after a non-completion certificate has been issued, a new certificate must be issued before the employer can claim liquidated damages. 

The JCT Design & Build Contract contains almost identical requirements. If an employer is unable to withhold liquidated damages from a payment because a non-completion certificate and notices have not been served in accordance with the contract, it faces certain risks. It will incur adjudication, arbitration or court costs pursuing the liquidated damages which would otherwise have been avoided; and/or will be unable to recover the liquidated damages because the contractor becomes insolvent.

The contract administrator or employer’s agent may have to compensate the employer for losses if it failed to issue, or advise the employer on the need to issue, the non-completion certificate and/or the relevant notices. 

Therefore it is important for architects acting as contract administrators and employer’s agents to ensure they do four things.

From the outset of the project they should be familiar with which contract requirements have to be met in order to deduct liquidated damages so deadlines are not missed, and should record in writing any advice they give the employer on those requirements. As far as possible, they should include in each notice the precise relevant wording set out in the contract. This limits the risk of the notice being determined not to comply with the contract. Finally, they should record in writing any instructions they are given by the employer. It is not uncommon for an employer to decide that it does not want to take steps to put itself in a position to deduct liquidated damages at a particular stage of the project because it does not want to damage its relationship with the contractor. Evidence of such a decision should be recorded. 

Doug Wass is a partner at Macfarlanes LLP


 

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