Application of Liquidated Damages in Construction

In the construction industry, Liquidated Damages (LDs) are predetermined financial liabilities specified in a contract to be paid if either party fails to perform. These damages are particularly relevant when it comes to delays. However, implementing LDs can become complicated when there is an unresolved Extension of Time (EoT) claim. LDs are not penalties for…

Application of Liquidated Damages in Construction

In the construction industry, Liquidated Damages (LDs) are predetermined financial liabilities specified in a contract to be paid if either party fails to perform. These damages are particularly relevant when it comes to delays. However, implementing LDs can become complicated when there is an unresolved Extension of Time (EoT) claim.

LDs are not penalties for delays. It is an agreed pre-estimation for employer damages/loss incurred by the contractor’s delays. The LD would not be enforceable by courts if dealt with as a penalty.

As a result, the enforceability of LDs in the context of an unsettled EoT claim would likely be closely examined during legal proceedings. In these situations, courts or arbitration panels would meticulously assess the reasons for and impact of delays and determine whether LDs were justly imposed.

Liquidated damages in construction

Legal principles governing the LDs and their application

In common law, a liquidated damages clause that is considered or utilized as a penalty may not be enforced; the liquidated damages clause should represent a genuine pre-estimate of damages to be enforced. Employers/Main Contractors should avoid using LDs clauses to minimize financial liabilities or offset risks. On the contrary, project owners or employers must ensure that any liquidated damages clause is based on a reasonable and justifiable estimation of potential damages, with a clear relationship between the cause and effect of damages. By doing so, both parties can avoid disputes and promote fairness in construction contracts.

What factors determine if the LD clause is enforceable or not?

One of the critical factors in determining the enforceability of the LD clause is ensuring that it is not used to undermine a party’s position during negotiation or exploit a party’s delay to make a business gain. it should be used for fair and equitable business representation.

The test for that is by ensuring that the LDs estimated -at the time of the contract- are reasonable. 100,000 USD LD per day for a 2 Million contract value represents not fair damages but an extravagant amount to keep the contractor under pressure.

With this concept clear, the LD will not be enforceable if an unsettled EoT or dispute is in place, especially if the delay liability is unclear. Enforcing LDs at this point might be temporary but will not be enforceable by the court.

References :

An Update on the Law of Liquidated Damages, Deposits and other Forfeiture Clauses in Ontario

Liquidated Damages Clauses: What You Should Know