Once you have realised the truth behind the pesky myths surrounding liquidated damages, you will need to consider what level of liquidated damages should go into your contracts.
There are a number of options:
- If you state £nil, then the client cannot recover any of its losses for late completion (this denies the client a right to claim general damages for breach of the contractual completion date); it would be better to state: ‘liquidated damages will not apply, and the client reserves it rights to bring a claim for late completion‘.
- If you state £1 or £1m per week or part then the client can recover that level multiplied by the number of weeks that the contractor is in culpable delay (ie late without having a chance to get an extension of time).
- If you state ‘all the main contractor’s losses including the liquidated damages payable under the main contract‘ then the contractor can only recover its losses once it has proved the amount of its loss and proved that the subcontractor caused those losses by its breach. [Read more on subcontractor delay damages]
What’s wrong with £1pw?
If you cannot agree a suitable level, the worst thing you can do it to write £1pw into the delay damages particulars. Here are a few of the reasons:
- the contractor may not provide a programme or once works have started revise its programme, as the completion date is essentially meaningless
- the contractor may not apply for extensions of time or compensation events for time only, as it will cost more to apply than it would save in liquidated damages
- the contractor will not agree to your proposal to accelerate the works, at least not without being paid handsomely
- the contractor will not organise its resources, materials and skills to meet the completion date – it can pay you £250 up front for 5 years of delay!
- the contractor has no incentive to organise its supply chain to meet the works programme.
Naturally, some of the contractor’s own costs are time-based costs eg for the hire of plant, equipment, facilities, labour and so on; so it does have an internal incentive to finish on time – to keep its costs low. But the contract for the works is not adding any incentive and if there is room in their budget, and nothing better to do elsewhere, you may find you have little power to get the project completed to meet your programme. And if the contractor can’t be bothered, your remedy in damages is a pyrrhic victory at best.
What about £1m per week? Well, unless it is extravagant or unconscionable [read more] then it is payable!
What should do you?
What you write into your contracts does not have to be reasonable to be recoverable. But it may have to be reasonable to get your contract agreed!