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A common clause for completion

Liquidated damages clauses are there to reduce costly disputes by making obligations and expectations clear, says Daniel Atkinson

Liquidated damages (LD) are in common use in the construction industry. They are essentially agreed damages for a breach of contract and in theory can apply to any breach.

In practice they are used in process contracts for breach of specified performance levels of plant, but the more common and extensive use is for breaches of contract which result in delay. They are commonly expressed as an amount for each day or each week delay.

LD clauses benefit both parties to a contract. The advantage is that both sides know the amount involved and there is no need for proof. The assessment of the loss for delay is a difficult process so the use of LD clauses reduces costly disputes.

In one sense LDs act as a limit to the liability. In a subcontract, for instance, the subcontractor will know the amount he has to pay if he completes late. In many contracts there will also be a cap to the total level of LDs and that clearly sets a limit.

Other obligations

The key question is whether this is the only remedy for the delay. There may be a number of obligations in a contract which relate to time. One is obviously the simple obligation to complete by a specified or extended date for completion. Another may be an additional obligation to progress the work regularly and diligently or to proceed with due expedition.

But there may be further obligations which if not complied with will affect the completion date.

For instance there may be an obligation to use reasonable skill and care in carrying out the work.

There may also be an obligation to construct to a specified standard and the making good of the defects arising from the breach of this obligation may delay completion.

Does the LD clause impose an exhaustive remedy only for the simple delay caused by the failure to complete by a specified date?

Is it possible for a contractor in a subcontract, for instance, to claim additional damages for the delay caused by breach of the other obligations and so escape the limitation of the LDs clause?

Keep to the LD clause

It seems sensible that if the subcontractor does not complete on time that its monetary liability should be only for the LDs regardless of how the delay was caused. That would provide the certainty envisaged by the LDs clause.

Otherwise the whole point of the provision would be undermined by expensive legal argument on distinctions between different types of obligations and their effects. It simply would not make commercial sense.

As is usual in contracts, the approach is to determine what the parties intended; whether indeed they did intend the LDs to be the sole monetary remedy for the delay whatever the obligation breached. It is a matter of interpretation of the contract.

The general position is that the LD clause covers all the damages for non-completion and are an exhaustive agreement as to the compensation for delay.

This means, for instance, that if the contractor has incurred costs in reducing the effects of the delay caused by the subcontractor, he cannot claim those costs in addition to the LDs. It will need clear words to depart from that general position.

Daniel Atkinson is a partner of Atkinson Law and the author of Causation in Construction Law