Tue 01 Feb 2022

What are liquidated damages and when are they payable?

Liquidated damages are also known as "liquidated and ascertained damages" or "LADs". They are the sum payable by a contractor who is in delay. 

A liquidated damages clause specifies a particular figure payable by the contractor. Our example contract, the SBCC Design & Build 2016 ("the Contract") sets out the rate of liquidated damages in the event of late completion in the Contract Particulars. They are payable per day, week, month or any other period agreed by the parties.  Usually these are specified as a weekly or daily sum.

In order to claim liquidated damages, the Contract requires the employer to issue a notice of non-completion if the contractor has not completed the works (or a section) by the completion date stated in the contract (subject to any extension of time awarded).  This is a pre-requisite to claiming liquidated damages.

Prior to the due date for final payment, the employer must have also notified the contractor that he may claim liquidated damages.  Then, within five days of the final date for payment, the employer must give the contractor a notice which either requires payment of liquidated damages or states that the employer will withhold or deduct the same from any sum due to the contractor.

If, however, the completion date is adjusted to a later date, the employer must issue a new non-completion notice if the new completion date is not met.  However, a further notice of the intention to deduct liquidated damages is not required. 

In the event that a new completion date is set after the deduction of liquidated damages, the employer must repay the liquidated damages applicable to the period up to the new completion date. 

An effective liquidated damages clause removes the need for the employer to prove its loss.  It also means that the employer does not need to suffer any actual loss to be entitled to payment of liquidated damages.  A liquidated damages clause may be deemed invalid if the level of damages is not a genuine pre-estimation of loss and is instead intended to be a penalty. Where there is no valid liquidated damages clause the employer must establish both that (1) it has a loss and (2) that the loss has been caused by the contractor's breach of contract.

Next week we will consider general damages.  If you haven’t read our previous delay blogs, they can be found here.

For advice on liquidated damages, or any other aspect of a construction contract please get in touch with our large and experienced construction team.

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