The short norm for the “Liquidated damages” is known as “LD”. The main intention of liquidated damage is to cover the client against the Contractor’s time-related obligations. If the Contractor breaches the contract, the client can ask (deduct) predetermined sum agreed as “liquidated damages” or “Delay damages”.
The principal of Liquidated Damages/ Delay Damages
Let us explain to you the principal of Liquidated damages. In the contract, there will be a sum defined per day as delay damages or liquidated damages. Once the Contractor failed to fulfil the agreed completion date (If the Client did not grant an extension to the Contractor), The Contractor is bound to pay this sum for each day exceeded from the agreed completion day as per the contract. And contacts define the maximum amount which the clients are eligible to ask as delay damages. In standard practice, this will be 10% of the contract value. Since this amount is fixed and predetermined under the contract, It is not treating as a penalty.
To impose liquidated damages contract should include several other requirements. The completion date or time for completion should specify in the contract. Also, the Employer’s taking over procedure also should specify in the contract. The client can only impose delay damages (liquidated damages) from the date of specified completion day in the agreement. Also, the agreed date should pass before charging the contractor.
Liquidated damages clause/ Delay damages clause in standard documents
FIDIC 1987 red book provides a clause for “Liquidated damages”, which is clause 47.1 (Liquidated Damages for Delay). But in FIDIC 1999 red book, it is defined as “delay damages”(clause number 8.7). And in FIDIC Red book 2017 it moves to clause number 8.8.
Furthermore, JCT 98 uses clause number 24 “Damages for non-completion” to cover against the Contractor’s obligation against the client.
Why are Liquidated damages critical (client’s perspective)?
Most clients want to complete their works as per the agreed timeline. As an example, one of our clients wanted to open a new medical centre. For that, they have asses geographical data and identified a suitable area for it. After that, they have rented out a newly constructed building in that area. But that building was not designed for a medical centre (A medical centre needs particular requirements). So the client has discussed with the Landlord and appointed a contractor for modification works.
Also, the client has made an agreement with the building owner to give an exemption time to start paying their rent. The Landlord agrees to give four months to complete the works with a rental exemption. So all final responsibility put on the contactors hand. The client may pay rent without any revenue if the contractor fails to fulfil the timeline. In these kinds of situations, clients can set liquidated damages (delay damages) clause to mitigate their risk.
Liquidated damages/ Delay damages-Related case laws
One of the most famous cases regarding delay damages is Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993). The Project is HK$649m tunnel construction, Which the client ( The government of Hong Kong) was split it into seven packages and awarded to different contractors. The claimant ( Philips Hong Kong) got package worth of HK$51m.
In contract, there are several key dates that partial deliveries are agreed, If not contractor bind to pay predetermined sums as liquidated damages. These amounts were specified for each milestone and also for the delay of the whole project.
Means If Philips (the contractor) failed to achieve any interim milestone, they have to pay a daily rate as specified in the contract. And also if they failed to complete the project as agreed in the contract, then contract mentioned separate liquidated damage fee. Failing to deliver any milestone plus complete project, then the Philips has to pay agreed liquidated damages separately for the milestone as well as the complete project.
In defence contractor stated that predetermined sum as delay damage is more significant than the actual loss occurred due to delays. Court has refused the Phillips argument stating that It is the Contractor’s responsibility to check the risk involved whether it is fair or unfair when agreeing on a sum as liquidated damages.
Furthermore Court stated that,
“Such a result would undermine the whole purpose of the parties to a contract being able to agree beforehand what damages are to be recoverable in the event of a breach of contract. This would not be in the interest of either of the parties to the contract since it is to their advantage that they should be able to know with a reasonable degree of certainty the extent of their liability and the risks they run as a result of entering into the contract. This is particularly true in the case of the building and engineering contracts”.Liquidated Damages Clauses – Enforceable or Penal?
Jeffrey Wilson, Partner, Sly & Weigall,