Contractors often bemoan the topic of liquidated damages
(otherwise referred to as "LDs"), and with good
It should go without saying that it is best to avoid having to
pay LDs in the first place. As hard as a contractor may plan and
prepare, there is no guarantee that it will not fall behind
schedule or miss critical deadlines.
If you choose to ignore the liquidated damages clauses in your
building contract when you sign it up, and you subsequently delay
the project, there is the potential for you to be exposed to
potentially catastrophic amounts of money to the head contractor or
principal under your building contract.
Building contracts, especially commercial building contracts,
commonly contain 'liquidated damages' or 'delay
damages' clauses which provide that a contractor is required to
pay a pre-determined sum of money, usually for delaying the
completion of the works under the building contract.
The parties agree upon the sum of liquidated damages at the time
of entering into a building contract and the sum is intended to be
a 'reasonable estimate' of any potential damages if the
contractor delays the project or delivers equipment or materials
past agreed deadlines.
Whilst it is all and well and good to say that theoretically,
the parties 'agree' to the sum of liquidated damages, in
practice this all truly depends on the extent of your bargaining
power. This can be easier if you are a prime contractor or larger
supplier, but if you are a subcontractor, negotiations may be more
difficult. You just want the job, at least at the outset.
At law, liquidated damages can only be a "genuine
estimate" of the loss that will be sustained in the event of a
delay. In the case of a commercial construction subcontract it
would be reasonable to charge the subcontractor a rate that is
commensurate with the rate that the contractor must pay to the
principal under the head contact.
Often however, subcontracts have liquidated damages provisions
that are more onerous than the head contract. If a liquidated
damages provision is held to be penal, it has no legal effect. But
to prove that a liquidated damages provision is penal would
necessarily involve initiating legal proceedings, which are
expensive in themselves and not to mention stressful. In any event,
the subcontractor may not entirely escape liability and will be
liable to pay such damages, as the head contractor is able to
In a time when competition for larger commercial building
contracts amongst contractors is rife, more often than not we are
seeing contractors sign up to liquidated damages provisions that
have not been properly assessed and considered. Indeed, sometimes
the more onerous subcontract agreements call for both LDs under
that agreement plus the right for the head contractor to seek
indemnity for any LDs they must pay under the head contract. In
these circumstances, the LDs have the potential to financially
cripple the contractor in the event that the contractor does not
reach completion by the deadline date.
The next time you consider entering into a building contract,
you need to be cautious of the amount of liquidated damages.
Knowing your ultimate exposure for delays can help you decide
whether to sign or not, or to bargain a less onerous deal.
It is advisable that you receive legal advice from experienced
construction lawyers before you enter into a building contract.
Your lawyer may be able to help you negotiate the best deal
possible regarding liquidated damages.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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