Up first: Liquidated Damages

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What we already know (or should know…)

Liquidated and ascertained damages, otherwise known as ‘LADs’, are an agreed fixed sum which act to compensate the Employer if the Contractor is in default. In the context of construction contracts LADs apply to delay. If a Contractor fails to complete by the Date for Completion the fixed sum will be deductible/payable on a daily/weekly/monthly basis.

What is the alternative?

An Employer may decide, on the basis of the specific requirements or commercial considerations for an individual project, that they would prefer to have recourse to unascertained damages (also known as general damages). Here it is for the innocent party to prove to the court that the other party’s breach caused the loss and for the court to decide the appropriate level of compensatory damages.

Owing to the significant time and cost implications of pursuing such a claim, Employers rarely rely on general damages. LADs, on the other hand, are straightforward (normally!) and well-used in the industry.

How do you calculate LADs?

Historically the test to determine if LADs were a penalty (and therefore unenforceable in English law) was whether the damages were a genuine pre-estimate of loss with Lord Dunedin’s[1] four tests providing helpful guidance.

The appeals in Cavendish Square v El Makdessi and ParkingEye Ltd v Beavis provided clarity and introduced further factors to be considered. However, from my perspective the important take away from these appeals was that, in the majority of cases involving straightforward damages clauses, genuine pre-estimate of loss remains the correct starting point.

LADs – Getting Contractual

In my experience many Employers are not aware of and fail to comply with notification requirements. To validly levy LADs under the JCT suite, for instance, Employers must issue four separate and sequential notices. Employers would be wise to consider pre-contract amendments to make these requirements less onerous.

Employers should also ensure that notices of non-completion have not been cancelled out by a subsequent extension of time as was the case in Octoesse LLP v Trak Special Projects Limited.

Finally, Employers should heed the warning laid down in Temloc Ltd v Errill Properties Ltd regarding the care required when completing the particulars of LADs clauses. The court held that a LADs rate of “£nil” acted not only as the value for contractual LADs but also to limit the Employer’s claim for general damages to nil. The Employer was therefore unable to recover any of its losses under the express contractual provision or in common law.

The Latest

The recent case of Triple Point Technology Inc v PTT Public Company Ltd highlighted the issue of LADs in instances where a second contractor is appointed due to the first’s failure to complete the works. The court ruled that what happens in the event of non-completion is dependent on the wording of the LADs clause. The Employer in Triple Point lost the right to claim LADs in respect of incomplete work and was instead required to prove its case for general damages. I would advise Employers to review and amend their contracts to ensure that they do not find themselves in a similar position.

[1] Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

Posted in Oliver Slater, Rachel Murray-Smith.