When to call on liquidated damages

Words:
Douglas Wass

Case law is a useful source of guidance on the complexities of when and how liquidated damages can be enforced

Building contracts generally specify a fixed weekly or daily sum of money (known as liquidated damages) to be used to compensate the employer if a project is handed over late as a result of contractor delay. In the event of such delay, as long as the relevant notices have been given to the contractor, the employer can either deduct the agreed sums from amounts otherwise payable to the contractor, or ask the contractor to reimburse the employer direct. Over the years, cases have provided guidance various issues.

One of these is how to determine the appropriate level of liquidated damages, to avoid them being construed as a penalty. Penalties are unenforceable, so the contractor would not have to pay. Instead, the employer would have to prove its actual losses to obtain compensation for delay (which can be costly and time consuming). Liquidated damages would be a penalty if they were out of all proportion to any loss the employer may actually suffer as a result of delay.

Another case gave guidance on whether or not an employer can recover more than the agreed sum, if its actual loss is more than the agreed sum: it can’t.
A third concluded that the notices which must sent to the contractor before liquidated damages can be deducted under JCT contracts have to be sent in a particular order. It also decided that a particular period of time is required between each notice. 

However, one issue which case law still has not resolved is whether liquidated damages can be levied after a contractor’s employment under a building contract has been terminated. 

 

Case law has not resolved whether liquidated damages can be levied after a contractor’s employment has been terminated

The traditional view, most recently supported in the 2010 case of Shaw v MFP Foundations and Pilings Ltd, is that liquidated damages will run until termination of the contract, but not beyond unless there is an explicit provision to the contrary in the contract (which, for example, JCT contracts do not include). Why? After termination, neither party has to perform its primary obligations. From a contractor’s perspective, this means the obligation to complete by the completion date ceases to apply. If liquidated damages continued to apply, a contractor could potentially have to pay liquidated damages even if an employer had been slow in finding a replacement contractor, and for any culpable delay by any replacement contractor. Not being able to claim liquidated damages will not leave an employer without any rights – the option of proving and recovering its losses is still open to it.

However, another case from 2010 (Hall & Shivers v Van Der Heiden) challenged this view, as the judge decided that liquidated damages should continue to apply after ­termination of the contractor’s employment. To find otherwise would, in the judge’s ­opinion, have allowed the contractor to benefit from its own breach of contract. 

Further support for this position was given in November last year, as part of a dispute about solar power generation plants. In GPP Big Field LLP v Solar EPC Solutions SL, when the contractor became insolvent the employer sued its parent for damages for late or non-completion of the works (under guarantees that the parent company had given). The judge, relying on Hall & Shivers, decided the liquidated damages provisions in the relevant EPC contracts continued to apply after the employer had terminated the contractor’s employment. 

The fact that there are conflicting court decisions on whether liquidated damages apply after termination is obviously not helpful to employers or contract administrators – particularly when they are seeking to resolve final accounts and make decisions about what, if any, sums can be claimed from contractors post termination. Until guidance on this is provided by the Court of Appeal, the safest course is to assume that liquidated damages do apply after termination unless the contract expressly states that they do not. 


Doug Wass is a partner at Macfarlanes LLP


In plain English: Practical completion
Unless the parties define practical completion in their contract, three following general principles apply. First, it occurs when all the construction work that needs to be done has been finished; and  secondly, works can be certified as being practically complete even though there are latent defects (that is, defects which are not immediately apparent on inspection) but not if there are patent defects. Thirdly, contract administrators have an element of discretion and can certify practical completion if there are very minor (or ‘de minimis’) works which are defective or incomplete.  The key question is whether to all intents and purposes the building in question is complete.  

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