What should be the contractor’s remedy when a subcontractor is running late?
Under freedom to contract, the parties can decide their rights, remedies, obligations and liabilities – they are masters of their contractual fate. The choice is between recovering an uncertain amount provided you can prove breach and loss in court (unliquidated damages) or agreeing a level in your contract which you can recover immediately and without proof.
An article on Carillion v Woods Bagot argued that:
“A right to claim unliquidated damages for delay is most commonly included in sub-contracts to avoid the difficulties of agreeing an appropriate rate for liquidated damages.
A simple pass-through of liquidated damages applicable under the main contract (with or without an addition for the contractor’s own costs) is likely to over-compensate the contractor where two or more sub-contractors are responsible for a given period of delay.
A lesser sum risks under-compensating the contractor where a sub-contractor is the sole cause of a given period of delay.
A provision which seeks to apportion an overall liquidated figure derived from the main contract raises additional factual difficulties in assessment which liquidated damages clause are intended to avoid.
The simplest solution is often to provide for an unliquidated right to claim damages for delay.”
This argument ignores several principles relating to liquidated damages:
- They are best used when it is difficult to agree an appropriate rate for LADs (and the court has repeatedly said this is no barrier to their recovery)
- They can over or under-compensate the innocent party – they act as a lower and upper limit on recovery
- They benefit both parties by creating certainty – unliquidated damages do not allow the subcontractor to decide if it is more cost efficient to accelerate the works programme or pay the price of delay
- They benefit both parties as they are recoverable by right without proof
- They are almost impossible to overturn and do not need forensic analysis of the amount of over or under-compensation
- They avoid the need for any factual assessment of the loss suffered – so a fixed percentage of the main contract LADs would create certainty
The simplest solution is not a claim requiring proof of delay, proof of loss and a causal link between each event and each loss.
What should you do?
The simplest solution is (imho) to agree a level of liquidated damages which balances the interests of both parties.
If the contractor is under-compensated from the figure agreed it nonetheless benefits from avoiding the cost and time required to prove its losses in legal proceedings. If the subcontractor is over-penalised then it will tend to factor this into its next tender price.