What Are Liquidated Damages?

In a construction contract, the parties funding a project require assurance that it will be completed on time and to their required standard. Delays or mistakes lead to financial losses, so the paying party (“the client”) (likely to be the employer or main contractor) must be compensated if issues arise. 

It is common to include a clause in these contracts protecting the client from such losses, as delays often arise in land development. This provision provides clarity and certainty to all parties at the outset and avoids the need for costly legal arguments and analysis about what loss can be proved proceedings when things go wrong and the work is delayed. 

This article explains what liquidated damages are, their conditions, and how they differ from general damages. For further advice, contact Helix Law. 

What Is Meant by Liquidated Damages?

Liquidated damages are a specified sum of money paid to a party to a construction contract in case of a breach of its provisions in relation to the completion date. They are compensation for the party who suffers loss because of the delaybreach. 

When entering into a construction agreement, the parties will agree in advance how much they will pay out for each day, week or month of delay beyond the contract completion date that is the fault of the party doing the work if anyone breaches one or more of its terms. The parties will state the amount due in the contract, which they usually set at a rate per day or week.

Essentially, the parties must quantify their potential losses in advance; the party in breach will pay the agreed amount without the other party having to prove the exact loss suffered. 

What Is an Example of a Liquidated Damages?

Imagine a landowner hiring a construction company to develop a block of residential flats. The landowner needs the construction company builder to finish the project by 31 December, and this deadline is stipulated in the contract. The contract will also include a separate clause (a liquidated damages clause) stating that the construction company will pay a fee of £1,000 for each day the project completion is delayed. 

Therefore, if they finish the development by 5 January the following year, they are in breach of contract and must pay the landowner £5,000 to compensate for the delay. 

While delay is the most common reason for this type of compensation, it can also arise if a party breaches another obligation. For example, a construction company may have agreed to install a heating system which meets specific energy performance standards. If they fail to do so, the other party can claim this type of compensation provided it is stated in their agreement.

What Conditions Must Be Met to Enforce Liquidated Damages?

The general rule is that the court will uphold them if the relevant contract term is fair and reasonable. This requires the parties to consider the following:

• The amount stated must reflect a reasonable and proportionate estimation of losses. While this can be difficult to determine in advance, the parties should take all steps necessary to quantify the anticipated loss accurately. Such steps could involve consulting a construction expert to ensure the amount is realistic. 
• The parties must intend the damages to be compensatory instead of a penalty. Their purpose is to reimburse the non-breaching party for their losses, so an excessive figure for a relatively minor breach is unlikely to be enforceable. 
• The relevant contract term must clearly state the amount payable in different scenarios, the trigger event that will give rise to payment, and how they have set the rate (e.g., per day). A lack of clarity could result in the court setting aside the clause or the non-breaching party receiving less than expected. 
• If a delay occurs without financial loss, the party in breach could seek to set aside the damages on the basis that the other party doesn’t require compensation. Therefore, parties should keep clear records and financial accounts to prove their losses. 

How to calculate Liquidated Damages?

The date from which Liquidated Damages run is the contractual completion date. Liquidated Damages will continue to accrue until the contract is completed or terminated. If terminated, LADs stop on termination, irrespective of whether the work under the contract was ever completed. 

What are General Damages?

General damages are another form of compensation awarded to a non-breaching party who suffers a loss due to another party’s breach of contract. The loss is not pre-determined but calculated after the event and must be reasonably foreseeable. 

They will apply as a default if a contract does not include a clause for liquidated damages. The claiming party will, therefore, need to prove the breach and the loss they suffered as a direct result. For example, a delayed project may cause the landowner to lose income from renting out the properties, so they could claim general damages as compensation. 

The Differences Between Liquidated and General Damages

There are various differences between the two types of compensation, meaning each offers different benefits and disadvantages. The table below summarises the key distinctions. 

Parties should seek expert legal advice on the most appropriate arrangement for their construction contract, as this will depend on their particular circumstances. 

Frequently Asked Questions

What Are Liquidated Damages Under UK Law?

Liquidated damages are a form of compensation specified in construction contracts—the contract predetermines when and how much a defaulting party pays the other in case of a breach – usually delay. The amount stated must be reasonable and proportionate and not aimed at penalising the breaching party. 

What Happens if Liquidated Damages are stated as £0 Under UK Law?

The innocent party will not recover anything for LADs or for general damages, as the parties have agreed the compensation amount is zero. When filling out a contract leave the LAD’s blank or not applicable to avoid agreeing zero damages.

Final Thoughts

Including a liquidated damages clause in a construction contract is an excellent mechanism for ensuring certainty and clarity regarding what happens when there is a breach. These clauses help parties avoid lengthy and costly legal disputes over the quantity of losses.

However, for liquidated damages to be enforceable, the amount must be a reasonable estimate of potential losses and intended to compensate, not penalise. General damages will apply if the contract does not include a liquidated damages clause, while requiring proof of the losses suffered.

Our construction team act for construction companies and developers in disputes across the country. This includes adjudications, enforcement, and technology and construction-related litigation. If you want to ensure your construction contract provides for all eventualities and remains enforceable, or if you need advice on a dispute, our experts are here to help. Contact Helix Law today for more information.