Liquidated Damages in Construction Contracts

Liquidated damages (‘LD’s’) or Liquidated Ascertained Damages (‘LAD’s’) in construction contracts are a sum of money paid by one party to another contractual party for a breach of the contract provisions. Both terms refer to the same thing. The money is intended to act as compensation. The most common reason for the payment of LD is delays. Consequently, it’s not unusual to see liquidated damages at a daily or weekly rate.

Liquidated damages are so-called because they allow the contractual parties to agree in advance how much loss would be suffered, and how much compensation should be paid in certain circumstances based on time, thus providing certainty and clarity. The alternative is to ask a court to decide, often via time-consuming and expensive litigation.

Contractors must take care when including or agreeing to a clause for liquidated damages in a construction contract. There are a few important considerations including:

• a need for careful consideration and analysis of the potential loss to ensure an accurate estimate. The sum needs to be reasonable and enforceable and care needs to be taken to defend against later argument the LD/LAD was actually a penalty clause. Penalty clauses in contracts are not valid, and are not enforceable;

• sometimes, a provision for liquidated damages is not appropriate. This needs to be carefully considered;

• there must be a causal link between the losses foreseen in the contract, and the breach, so the damages reflected in the agreed LD/LAD must flow from the breach and cannot be too remote, or too far removed, from the actual breach or issue that creates the need for LD/LADs to be paid.

• Liquidated damages can include loss of income, rent, fees, storage or rental costs and fines imposed by third parties.