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Construction & Engineering

LADs will be LADs

It is often the case that you hear about a challenge to the rate to be levied by an Employer for delayed completion by way of liquidated and ascertained damages (“LADs”) in a particular contract. Case law is riddled with such occurrences alleging that sums ‘extravagant’ and ‘unconscionable’. As a rule, LADs are compensatory. I hear people talk about ‘penalties’ in the context of LADs, which sets alarm bells ringing as penalties are invariably void as a matter of public policy in English Law. You do not want to muddy the waters there in case there is an issue at a later date.

By contrast, we are less likely to see cases whereby an Employer argues that the LADs rate does not compensate it for the losses that it has actually incurred. What then? Is the LADs rate capped or, as lawyers tend to call it, an ‘exhaustive remedy’ for losses relating to delay?

The general principle in any construction contract which contains an agreed rate for liquidated and ascertained damages (“LADs”) is that damages for delay are capped at that amount times the length of the delay suffered by the Employer. This effectively serves to limit the Contractor’s liability.

This is a long-standing principle enshrined in the case of Temloc v Errill Properties [1987] and the reason why parties spend time assessing what the likely impact of delay will be to an Employer. The LADs rate is then set as constituting a genuine pre-estimate of that loss.

But further case law (Chattan Developments v Reigill Engineering [2008]) requires the contract to be read as a whole and interpreted as such, which requires a proper analysis of what the contract says to understand the intent of the parties.

As Ramsey J (as he was) said at para 31 of Chattan Developments:

“Unliquidated damages are not recoverable because the parties' agreement of liquidated damages replaces the remedy which would otherwise be available for breach. As can be seen from Temloc, the question of whether unliquidated damages could be recovered was a matter of the interpretation of the agreement from which it was possible to find a clear intention to exclude that remedy. In the case of a written agreement, that clear intention can be usually derived by construing the terms of the written agreement as a whole. For example, it was not necessary in Temloc for there to be an express exclusion clause to preclude the remedy of unliquidated damages.”

The difference in Temloc is that the LADs rate was expressed as “£nil” and it was clear that only liquidated damages were contemplated by the parties. The question is whether that would also be the case where the contract has an amendment giving the contract administrator the power to deduct any damages which are ‘fair and reasonable’ for delay from a loss & expense claim by a contractor. The situation is not so clear, is it? In those circumstances, the parties have clearly agreed (by express amendment) that some element of unliquidated damages could be recovered for delay above and beyond the LADs rate. Reading the contract as a whole, then unliquidated sums could (and perhaps, should) conceivably be claimed subject to the usual rules of evidence.

The clear message is to ensure that the LADs provision adequately covers an Employer for any delay, howsoever arising, at the time of agreeing the contractual terms. The courts are slow to construe the rate as a penalty unless it is grossly exaggerated so there is some recognition that it may be difficult to accurately predict the consequences of delayed completion. This will be even more important where an Employer has obligations to third parties reliant on timely handover.

Incidentally, if there is any reason for the LADs rate to be unenforceable, this may be a way of lifting any cap on recovery of losses. Similarly, if the circumstances arise whereby the Employer has no option but to operate termination provisions, then it may be that the LADs clause does not survive such termination at all in which case there may be a claim for general losses.

Much depends on the wording of the contract, so check that the position is the same as you have agreed before (or not) as this area of law can be extremely fact-sensitive. 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

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