Liquidated Damages – An overview

Liquidated damages are commonly used in construction contracts and are a daily sum of money which a contractor would pay to an employer if a contractor does not hand over a property on or before a certain agreed date. The daily sum should not be a penalty, but rather must be a sum which is a genuine estimate of the daily loss which an employer would suffer arising from a delay in being handed possession of a property.

Potential Enforceability – matters for consideration

• Contra Proferentem rule – This means that in the event of a dispute as to the interpretation of a clause in a contract, the preferred meaning would be against the party who drafted the clause. Accordingly care should be taken to ensure that the relevant clauses are clear and unambiguous.
• Genuine pre-estimate and not a penalty – Again care should be taken to ensure that a daily sum for liquidated damages is a genuine pre-estimate of the loss that would be suffered, and not a penalty. In the event that the daily sum is found to comprise a penalty then it would likely be unenforceable.
• Extension of time – Contracts typically include an extension of time clause, which lists reasons as to why the completion date may be extended. Liquidated damages would only become payable if the property is not handed over by the newly extended date.
• Sectional Completion – Depending on the size of a project there may be a different date for completion of particular sections. Accordingly liquidated damages may arise for each sectional completion or for a project as a whole.
• Contractual make up – In the event that it becomes necessary to seek liquidated damages then the relevant clauses in a contract should be clearly read, and steps taken to seek recovery of such monies in line with the contractual requirements. For example whether such monies could be deducted by the employer from monies due to a contractor, or whether a contractor could separately pay the employer.
• Cap – Alongside a daily sum for liquidated damages a cap on liability for consequential damages could be considered so that a contractor’s total and cumulative liability for any and all loss, damages, costs and claims does not exceed a certain agreed figure.

Conclusion

Care should be taken when drafting a liquidated damages clause, and which should assist in avoiding a dispute. It is crucial that liquidated damages are a genuine pre-estimate of loss and not a penalty. The contractual wording should be clear, and lay out clearly the steps to be taken in the event of a claim. This should include clarity on any extension of time entitlements, so that a completion date can be readily agreed.

For further information on this topic, please contact Godfrey Hogan at ghogan@reddycharlton.ie