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Wise to determine the penalties for delayed completion up front

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legal matters

Liquidated and ascertained damages - dontcha luv'em! Nowadays, it's true that the courts are keen to uphold provisions for liquidated and ascertained damages (lad) in building contracts. They would rather enforce the parties' agreed pre-estimate of the employer's losses caused by delayed completion of the works than investigate the actual losses incurred. The employer's actual losses will depend upon the type of employer and the nature of the works. Private individuals renovating their homes will have to rent alternative accommodation. The losses suffered by commercial concerns are more complex. There is the additional expense of maintaining their existing building for longer than expected. At the same time the company will be robbed of the benefit of moving into the new building, loosing productivity or anticipated revenue. The equation is further complicated when the employer does not operate for profit. With local authority housing contracts, delay costs can be calculated as the loss of rental revenue from the unfinished dwellings. What if the loss is for use of new offices? When assessing damages payable for the loss of a non-profit earning asset, the courts have used the loss of use of the capital invested as a measure. But you can see why they would rather apply a weekly rate agreed between the parties and included in the contract appendix.

With the benefits of convenience and certainty, do contracting parties rush to embrace lad clauses and ensure they have workable provisions to reflect the employer's entitlement in the event of the contractors' culpable delay? No, not in real life.

Some employers fight shy of lad, considering them old-style penalties and not wanting to be seen to be too 'contractual'. This is unwise. Without the right to deduct lad, employers who find that, inexplicably, they have not taken possession of their building when expected, have no redress other than the drastic options of determining the contract or calculating their actual losses. In fact it is amazing how the prospect of having even the smallest sums taken off their final account concentrates contractors' minds most wonderfully in run up to practical completion.

Other contracting parties are reluctant to jeopardise the pre-contract ambience of optimism and bonhomie with the spectre of damages for delay. Instead they agree, for example that, lad will be deducted at the rate of '£ nil'. When the contract ends in acrimony it falls to the court to decide whether '£nil' means that there will be no damages for delay, or rather that there will be no lad but that the employer is still free to claim actual losses. In Temloc v Errill Properties, the Court of Appeal decided that liquidated damages are an exhaustive remedy for delay - if you have agreed to '£nil' then you will get no damages for delayed completion.

Sometimes the contracting parties mean well but get themselves into muddles as to how the lad clause is to operate.

Contracts for the construction of housing units, for example, may provide for one completion date but allow the employer to take possession of the units as they are completed or they may provide for staged, sectional completion. The contractual provisions for the deduction of liquidated damages should work in tandem with completion regime. In Bramall & Ogden v Sheffield CC the contract for local authority housing had one completion date. It also provided for liquidated damages to be deducted at the rate of '£20 per week for each uncompleted dwelling'. The court found that the clause could not be operated without provision for sectional completion and that lad could not be recovered.

Similarly some parties know what they mean but never get round to defining it. They put in provisions such as 'the likely cost of alternative accommodation' or 'total lost rental income'.

Legally, they have confused the concepts of liquidated and actual damages. Practically, however, they have failed even to reach agreement as the rate of liquidated damages, much less record it. One thing, at least is clear from all this: no agreed rate - no liquidated damages.

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