Liquidated and ascertained damages (“LADs”) clauses are par for the course in standard construction contracts; they are a pre-determined amount of damages, usually set as an amount per week.
Contracts generally include a provision for the contractor to pay LADs to the employer in the event that the contract is breached. In building contracts, the breach which LADs usually relate to is delay, i.e. the contractor failing to achieve practical completion.
LADs are set out at the time the contract is entered into. They can benefit both parties as they: provide contractual certainty, do not require proof of loss, simplify disputes and also provide a cap on liability. Employers see LADs clauses as a mechanism to encourage the contractor to keep to programme. However, the parties should be aware that in most instances, the LADs clause will be an exclusive remedy for the breach in question and it is therefore important to set the correct level of LADs (see Jon Close’s article below: LADs will be LADs).
LADs are not and cannot be a penalty and they must be based upon a genuine pre-estimate of the loss that will be suffered by the non-breaching party in the event that the works are not completed on time. If they are not a genuine pre-estimate of loss, the courts may not enforce them.
If a contract prevents the employer claiming LADs or if the LADs clause is for some reason unenforceable, the employer may claim for unliquidated damages through the courts. This removes the certainty of LADs and requires the employer to prove that an actual loss has been incurred and that that loss was not too remote. This can be a long, tedious and expensive task and both parties (but especially employers) should therefore ensure the LADs clause is correctly completed at the time the contract is entered into.
You can contact Katie Pickering on firstname.lastname@example.org or 01242 248271.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice. “Cutting through the legalese” in particular is intended to be a short and introductory feature which does not provide comprehensive guidance on the topic in question. Legal advice should always be sought.