Liquidated Damages

Liquidated Damages in United Kingdom

Liquidated Damages in Contract Law

According to Questions & Answers Law of Contract: Law Revision and Study Guide (Law Questions & Answers, Oxford University Press), by Adrian Chandler and Ian Brown, Liquidated Damages may have the following meaning: see damage – n. Loss or harm. Not all forms of damage give rise to a right of action; for example, an occupier of land must put up with a reasonable amount of noise from his neighbours (see nuisance), and the law generally gives no compensation to relatives of an accident victim for grief or sorrow, except in the limited statutory form of damages for bereavement (see fatal accidents). Damage for which there is no remedy in law is known as damnum sine injuria. Conversely, a legal wrong may not cause actual damage (injuria sine damno). If the wrong is actionable without proof of damage (such as trespass to land) and no damage has occurred, the claimant is entitled to nominal damages. Most torts, however, are only actionable if damage has been caused (see negligence). In libel and some forms of slander, damage to reputation is presumed.

Liquidated Damages in Construction Contracts

Time limit for the issue of the certificate of non-completion under SBC and IC

The certificate of non-completion is governed by clauses 2.31 and 2.22 in SBC and IC, respectively. These clauses provide that the certificate must be issued by the architect if the contractor fails to complete the Works by the contract date for completion or any extension of that date. There is no express stipulation that the certificate must be issued by any particular date, although it is surprising how many people believe that it must be issued within seven days of the contractor’s failure to complete. This is incorrect. The only time limit is that imposed by the issue of the final certificate. The final certificate is the architect’s final action under the contract. After issuing it, the architect is functus officio – that is to say the architect has no further powers or duties and, therefore, cannot issue the non-completion certificate.

It may be argued, with some merit, that the contract clearly envisages that the certificate will be issued promptly because, on a practical level, the later the certificate is issued the less money will be available from which the employer can deduct liquidated damages.

Deducting liquidated damages from the original contractor until practical completion is achieved by others

In general terms, it appears that termination of the employment of the contractor brings the obligations of both parties to an end in so far as future performance is concerned.1 This seems to be perfectly in accordance with good sense, because the original contractor can have no control over the completion if the Works are completed by another contractor. That is not to say that a party will avoid the payment of damages accrued up to the time of termination.

The decision in re Yeardon Waterworks Co & Wright3 suggests that the courts will support a specific term in the contract that provides that in the event of termination of the employment of a contractor and the completion by another, damages could be deducted until the Works are completed. In that case, however, the Works were completed by the guarantor of the contractor, which was probably the deciding factor.

The JCT series of contracts provide for termination of the contractor’s employment, following which the employer may engage another contractor to enter site and complete the Works. Such a clause was held to be incompatible with the right to liquidated damages in British Glanzstoff Manufacturing Co Ltd v General Accident Fire & Life Assurance Corporation Ltd. If a contractor has left the site, wrongly thinking that the Works are complete, it seems that contractor will be liable for liquidated damages until the Works have in fact been completed by a replacement contractor. The precise wording of the clause in the contract will be the deciding factor. In the New Zealand case of Baylis v Mayor of the City of Wellington,6 liquidated damages were held to be deductible after termination because the clause specifically excluded entitlement during the time taken by the employer to secure a replacement contractor.

In re White, the electric lighting contract contained what was held to be a liquidated damages clause. The court remarked that there was a clause in the contract which gave the engineer power, if necessary, to employ other contractors to complete the Works, and which provided that the defaulting contractor should be liable for the loss so incurred without prejudice to his obligation to pay the liquidated damages under the contract. It is not clear from the report whether the employer was seeking liquidated damages beyond the date of termination. The employer does not, however, appear to have claimed anything other than liquidated damages despite the words of the contract, which appear to give the employer the right to claim liquidated damages for breach of obligation to complete on time until the date of actual completion, together with all the additional costs associated with completion by another contractor.

The effect of termination on the right to recover damages was considered in Photo Production Ltd v Securicor Transport Ltd. Speaking of another case, it was said:

“when in the context of a breach of contract one speaks of ‘termination’ what is meant is no more than that the innocent party or, in some cases, both parties are excused from further performance. Damages, in such cases, are then claimed under the contract, so that what reason in principle can there be for disregarding what the contract itself says about damages, whether it ‘liquidates’ them or limits them, or excludes them?”

This seems to be a clear reinforcement of the view that there can be no continuing liability to pay liquidated damages, but damages already accrued are recoverable. Standard forms of building contract state the grounds on which either party may terminate the contractor’s employment under the contract. Many of the grounds for termination under the provisions of the contract are not breaches that would entitle the employer to terminate, save for the express provision. It is thought that an employer who terminated using the contract provisions is restricted to recovering the amounts stipulated in the contract.

Current building contracts do not appear to allow the continued deduction of liquidated damages after termination. In any event, the circumstances set out in the question suggest that, even if the contractor’s employment was not terminated, liquidated damages would not be due until a further month had passed, because at the date of termination the date for completion had not been reached.

Employer suffering no actual loss

The whole idea of liquidated damages is that it is a pre-estimated amount which the parties have agreed shall be paid on the occurrence of some event. In relation to construction contracts, the event is usually failure by the contractor to complete by the completion date specified in the contract. If there was no such agreement in construction contracts, the employer would be obliged to take legal action through the courts to recover any losses suffered as a result of the late completion. That would involve proving that the contractor had a contractual duty to complete by a certain date, that the contractor failed to complete and the amount of loss that the employer suffered as a direct result. To achieve that through the courts or even arbitration would be time-consuming and expensive. In order to avoid that situation, the parties agree, and standard form construction contracts have special clauses stating, that an agreed sum will be payable in the event of late completion. The sum is usually expressed as per week or per day.

It is established that the sum must be a genuine pre-estimate of loss as viewed at the time the parties entered into the contract. In other words, it must be the employer’s best estimate of the loss which would be suffered if the contractor delays completion. It does not matter if the likely loss is difficult to estimate and the employer can only make an informed guess. Once the sum is in the contract and the contract is agreed, the employer may recover the sum if the contractor defaults. The employer is free to recover less than the amount stated but not more. The employer does not have to prove the loss; that is the whole purpose of liquidated damages. Therefore, the employer may recover the whole sum for the whole period in which the contractor is in default of completion, even if there is no loss or even if the employer makes a profit as a result of the late completion.

Two separate contracts with the same contractor

(In this case, is the) employer … entitled to set-off liquidated damages due on one contract against payment due to the contractor on the other contract?. Set-off is when two parties owe money to each other. Suppose party A owes party B £200 and party B owes party A £500. Party B can pay party A £300, and party B is said to have set-off one debt against the other, leaving a net payment due. It frequently occurs in the construction industry when a contractor pays a sub-contractor for work done but reduces the amount because the sub-contractor has caused a delay or done some damage which the contractor will have to pay to get repaired. This type of set-off is termed ‘equitable’. The type of set-off which is set out in a contract between the parties (for example, liquidated damages) is termed ‘contractual’.

The rules of set-off are quite complicated, but the general rule is that equitable set-off can only occur between two parties to the same contract. Therefore, if a contractor owes money to a sub-contractor on one contract, it is not usually permitted to reduce the amount to take account of money owing from the sub-contractor on another contract. Section 10 of the Unfair Contract Terms Act 1977 also appears to exclude this.

However, there are exceptions to this rule, such as in the case of “In Geldof Metaalconstructie NV v Simon Carves Ltd”.

Source: David Chappell, Construction Contracts: Questions and Answers, July 2010



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