Ensuring your rates of liquidated damages ("LADs") are a "genuine pre-estimate of loss" at the time you enter into a construction contract is no longer enough to ensure that they will not later be held to be a penalty and therefore unenforceable.
In Unaoil Ltd v Leighton Offshore Pte Ltd [2014] EWHC 2965 (Comm) a rate of LADs was agreed between the parties in relation to a contract which was subsequently varied and the value of the contract reduced. No change was made to the agreed rate of LADs at the time of the variation. Eder J in the Commercial Court held that even though the agreed rate of LADs may have been a genuine pre-estimate of loss at the time of the contract, the rate of LADs was penal and therefore unenforceable as the agreed rate of LADs could not have been a genuine pre-estimate of the losses which might be suffered under the varied contract.
Consequently, when varying contracts parties need to be aware that they may inadvertently be rendering pre-agreed positions on LADs unenforceable if the nature of variation is relevant to the losses a party is likely to incur.
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.
