In an ideal world every construction project would start and finish on time. In a real world some projects complete on time and some don’t.
Delays occur, disputes arise and variations are instructed. The project is completed but not by the contractual completion date. The contractor is not entitled to an extension of time and is now liable to pay Liquidated Ascertained Damages (LADs) for the time period from that deadline to the date when the contractor actually completes the project.
The effect this could have on a contractor could be detrimental in so far as the solvency of a contractor or turning a profitable contract into a loss making contract. It is imperative to understand the purpose of LADs in contracts.
If the contractor fails to complete the project on time, the contractor is in breach of contract which gives rise to a claim for damages. The measure of damages in respect of a contractual breach is the amount which would restore the ‘injured’ party, so far as money can do it, to the position that they would have been in had the breach not have taken place. The party who has suffered the breach, e.g. the employer, has to prove that the breach has occurred and prove their loss in monetary terms.
The parties may decide that an ascertained sum shall be payable by the contractor in the event a breach occurs and under a building contract the breach is likely to be in regard to late completion, in the form of an LAD clause which states the amount payable for each week the project is late. In the event of late completion, the agreed sum, namely the LADs becomes payable regardless, so the actual financial loss that the employer may occur, without the need for the employer to prove their financial damage (a pre-requisite to claiming general damages).
- ‘Liquidated’ – Means a fixed or ascertainable sum. A clause within a contract which states for example ‘£1,000 per week for every week that the work remains incomplete‘ is fixed even though the total amount actually payable cannot be ascertained until the length of the delay is calculated.
- Start date – There must be a start date from which the delay can be assessed. The trigger date under a main contract is the date stated in the architect’s certificate of non-completion on which the works should have been completed. The period from that date to actual practical completion is the time period for determining the amount of LADs payable. If an architect’s certificate is not issued, there is no specific period available for the calculation of LADs and as such, the damages recoverable become ‘at large’, which means the employer has to prove that they have suffered financial loss and demonstrate the actual amount of the loss incurred.
- Genuine pre-estimate of loss – The sum representing the LADs must be a genuine pre-estimate of the loss which the employer is likely to suffer if the project is not finished on time. This sum is agreed before the contract is entered into. If the sum stated is arbitrary it may be challenged as being a penalty.
Liquidated Damages v General Damages
Whilst it is not obligatory for parties to include an LAD clause in their contract, the employer may decide to claim for his actual loss rather than be tied to a specific sum which they may gain from, or lose but they can’t choose both.
If the LAD entry within the appendix, for example in a JCT form of contract, is not filled in and no figure is stated LADs do not therefore apply and the employer can claim actual loss for late completion.
Advantages of Agreeing LADs
- It creates certainty for both parties if a specified breach of contract occurs;
- The contractor’s liability may be limited if there is delay to completion of the project;
- The parties may save time and expense if they agree a rate for LADs as it may dispense with the need for costly and protracted legal proceedings to establish the extent of the employer’s losses flowing from a breach of contract.
The Courts’ Approach to LADs
The courts recognise the benefits of LADs and are keen to enforce them if they have been agreed by the parties, provided they are a genuine pre-estimate of loss. Recent cases have highlighted a change in the courts’ approach. Where a LAD clause does not represent a genuine pre-estimate of the loss suffered it may be enforceable provided that there was a commercial justification for the LADs clause and its predominant purpose was not to act as a deterrent against breach.
In El Makdessi v Cavendish Square Holdings (2013), the Court of Appeal found that the LAD clause was a penalty and was not commercially justifiable. The sum the seller stood to lose as a result of the specified breached was out of all proportion to the amount of liquidated damages which the seller was entitled to deduct. The dominant purpose of the liquidated damages clause was obviously to deter to the buyer from breaching the contract.
In contrast, in Azimut-Benetti v Healey (2010), the court found that a LAD clause was commercially justifiable because of the need for the employer to avoid the inevitable delay of trying to prove and recover actual losses arising out of a breach.
In view of the changing approach of the courts towards LADs, employers are advised to keep detailed records of how the LADs were arrived at and the reasons why a high rate of LADs has been agreed within the contract, to ensure the ‘commercial justification’ element can be taken into consideration later on.