In this article Senior Quantity Surveyor Danny Beever examines the purpose of Liquidated Damages in construction contracts and the extent to which they act as an exclusive remedy for a breach.
Why have a Liquidated Damages Provision?
Liquidated Damages are a predetermined amount agreed in the negotiation of a contract that are to be paid in the event of a specific breach. Usually in construction, they are used to indemnify the employing party for a delay to completion and are set at a fixed rate or as a percentage of the contract value, per week or per day, for the period of delay[1].
Inclusion of a Liquidated Damages provision can mutually benefit the contracting parties for several reasons. Having a set figure for delay damages gives commercial certainty to both employer and contractor by having clear risk of financial exposure in place. Another key advantage is that Liquidated Damages eliminates the often considerable time and expense involved in agreeing general damages. Avoiding such disputes, by having a pragmatic and simple way of claiming damages, can also limit the negative impact on the parties’ future commercial relationship.
Other advantages of the provision include providing a limitation to contractor’s financial liability if they delay completion. Liquidated Damages can also provide a benefit by incentivising a contractor to perform and complete on time.
An Exhaustive Remedy?
There is some debate as to extent to which Liquidated Damages represent an exhaustive remedy for a breach. Seemingly not to make them the sole solution invalidities their purpose of providing commercial certainty if the employer is able to elect to claim general damages in addition, or as an alternative, to Liquidated Damages[2].
The courts have been consistent in upholding Liquidated Damages as being an exhaustive remedy.
In Temloc v Errill Properties Ltd [3], the employer had inserted ‘£nil’ as the rate for liquidated damages within the contract. The court held that this meant that the parties had agreed that there should be no damages for delayed completion. This agreement was to be exhaustive, and the employer was not able to claim general damages for the breach.
In Pigott Foundations Ltd v Shepherd Construction Ltd [4], the main contractor looked to claim additional general damages due to delays caused by Pigott arguing that the Liquidated Damages provision in the subcontract was only a limitation of Pigott’s liability for Liquidated Damages passed down from the main contract. In this case, the judge said:
‘The effect of a provision for the payment of liquidated damages for delay in a building contract has been considered in a number of recent authorities from which it is clear that not only does such a clause have the effect of imposing a liability upon the party who is responsible for the delay to pay damages at the stated rate but also it has the effect of precluding the other party to the contract from seeking to avoid the limitation on any amount of damages contained in a liquidated damages clause…’
Like Temloc, this case the upholds that the employer cannot avoid the limitation of liability that Liquidated Damages puts in place. A similar ruling was also made in Surrey Heath Borough Council v Lovell Construction Ltd [5] where it was found that an employer could not elect whether they applied Liquidated Damages or claim general damages.
‘Simple Delay’, Mitigation Costs and Termination
The courts have also considered whether Liquidated Damages extend beyond the simple breach of not completing on time or if breaches of other obligations which cause delay gave rise to additional claims. In Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH [6] the judge failed to see a distinction between simple delay and other breaches causing delay.
‘…I do not consider that it is possible to draw a distinction between a “simple” failure to complete and a failure to complete caused by breach of another obligation. If there is a failure to complete, then liquidated damages are “the only monies” due for such default. If there is a breach of another obligation and that breach causes a failure to complete then liquidated damages are still the only monies due for that default, that is a breach of contract causing a failure to complete on time.’
The judge, in a clear validation of the commercial purpose of Liquidated Damages being a sole remedy, also said:
‘I do not accept that a liquidated damages clause which only applied to a case where there was simply a failure to complete on time without a breach of any other provision would make commercial sense.’
This case also reviewed claims by the employer for additional damages to cover mitigation costs in their attempt to alleviate the delay. Whilst these are usually recoverable as general damages, the court ruled that mitigation costs are to be considered included in the rate of Liquidated Damages.
The recent case of Triple Point Technology, Inc v PTT Public Company Ltd [7]also gives certainty on Liquidated Damages following termination of the contract. The Supreme Court’s decision was that Liquidated Damages should apply up to the date of termination. This means that Liquidated Damages are likely to be an exhaustive remedy for delay in the event of termination although the employer may be able to claim general damages after date of termination.
A Limit on General Damages?
There is still some uncertainty as to whether Liquidated Damages are exhaustive in the sense that they limit the value of a successful claim for general damages. If a Liquidated Damages clause becomes inoperative, for example if it is found to be a penalty as per the test in Cavendish Square Holding BV v Makdessi [8] or if time is at large, then the employer may have a claim for general damages. In making a claim, the employer may be able to show that their actual damages exceed the sum of Liquidated Damages. Whilst there is no clear rule from the courts that Liquidated Damages limit a claim for general damages[9], it is unclear whether a such a claim would be successful. If it were, then this would give rise to a situation where an employer could intentionally make a Liquidated Damages inoperative in order to claim a greater sum in general damages [10].
Conclusions
The courts hold a consistent approach that Liquated Damages represent an exhaustive remedy for delay for an operative clause and that they are keen to protect the commercial motives of the provision.
Employers should note the extent to which they are deemed exhaustive when negotiating contracts. Other breaches by the contractor that cause delay, such as defective works, and their own costs to mitigate the delay all need to be considered.
An article written by Danny Beever
[1] Keating on Construction Contracts (11th Edition) 10-001
[2] Brian Eggleston, Liquidated Damages and Extensions of Time: In Construction Contracts (Third Edition, Wiley-Blackwell 2009) page 6.
[3] (1987) 39 BLR 30 (CA).
[4] (1993) 67 BLR 48.
[5] (1988) 42 BCR 25.
[6] [2008] EWHC 6 (TCC);(2008) 118 Con. L.R. 104.
[7] [2021] USKC 29
[8] [2015] UKSC 67
[9] Brian Eggleston, Liquidated Damages and Extensions of Time: In Construction Contracts (Third Edition, Wiley-Blackwell 2009) page 57-58.
[10] Will Hughes et al, Construction Contracts: Law and Management (Fifth Edition, Routledge 2015) page 340.
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