One of my favourite activities in contract workshops when we are reviewing time, is to ask whether the Wembley damages of £120,000 per day are a penalty or fully recoverable by the client (notwithstanding arguments about whether the contractor is entitled to an extension of time).
Invariably some of the classic myths about delay or liquidated damages are trotted out:
- they have to be a genuine pre-estimate [as stated in RICS 2012 Guidance]
- they have to be reasonable [myth busted]
- the client has to prove it has suffered a loss [myth busted]
- the client should base them on a breakdown [as stated in Designing Buildings wiki]
- they can’t be a penalty [read more]
- they have to be fair [read US article]
- they cannot be used to threaten the contractor to finish the works [read more]
The level of damages does not have to be proven – the employer does not have to suffer any loss and can still recover delay damages.
The two bases on which the courts might (and it is a slim chance) refuse to enforce a level of damages written into a commercial agreement are either:
- There is no commercial justification for the damages [read more]
- The damages are extravagant or oppressive compared to the greatest loss that the client could suffer [read more].
As set out in this article:
as a general rule, if a liquidated damages clause has been negotiated in a commercial contract made between two parties of comparable bargaining power, and has survived scrutiny by the parties and their legal advisers, then there will be a strong initial presumption that the clause is not out of all proportion to the employer’s legitimate interests in timely completion. This is the case even if it is penal in its nature and impact; it is intended to deter a breach of contract; and it is not representative of any actual financial loss the employer may have suffered.
Beware the myths!