Liquidated Damages – make sure they are enforceable

Liquidated damages clauses are common in the construction industry in respect of late delivery of projects. They appear not only in building contracts but also in development agreements as between the developer and the proposed end user.

The advantage for the party entitled to liquidated damages is clear. It avoids having to prove loss – which can be a time consuming and costly process.

Ever since the 1915 decision of the House of Lords in Dunlop Pneumatic Tyre Co –v- New Garage and Motor Co, the courts have accepted that contracting parties can agree to liquidated damages clauses and that these are enforceable – provided the amount is a genuine pre-estimate of the loss.

The recent unreported case of North Sea Ventilation –v- Consafe Engineering is a reminder that defaulting contractors and developers may challenge (here unsuccessfully) the liquidated damages on the basis that amount is not a genuine pre-estimate of the loss at the time the contract was created. In this case the liquidated damages increased as the default became more serious but the court accepted this.

Parties waiting to be entitled to claim liquidated damages should make a proper assessment of the likely amount and, where practical, maintain records showing how the amount has been calculated. The amount of the liquidated damages should not really be a figure that is negotiated as part of the general to-ing and fro-ing. The figure either represents a genuine pre-estimate of the loss or it does not (in which case it is a penalty).

The onus of proving that liquidated damages are in fact a penalty will always rest with the party responsible for paying the damages. This party will have an uphill struggle but it should never be forgotten that the figure might be challenged by a contractor or developer seeking to avoid liability.