17
CONSTRUCTION EUROPE
SEPTEMBER 2013
LAW AND CONTRACT
are extremely time consuming
and disproportionately costly.
In order to avoid the need
for a court to step in, most
construction contracts contain
liquidated damages provisions
(also referred to as LDs, LADs or
ascertained damages), which fix a
pre-determined rate of damages
BREACHES
In relation to delay-related
breaches, an employer will be
entitled to deduct that pre-
determined amount for the
period of the contractor’s breach,
usually a fixed sum for each day,
week or month.
LDs have several advantages
over general damages. Principally,
the employer is not required
to demonstrate loss in order to
claim LDs. Its right to claim LDs
is triggered on the contractor’s
breach of contract. As a result,
issues of remoteness do not arise,
and the employer is not required
to mitigate its loss as under a
claim for common law damages.
LD provisions are not, however,
without risk. Penalty clauses are
prohibited under English law. As
LDs automatically apply without
proof of loss, poorly drafted LD
provisions run the risk of falling
foul of the prohibition against
penalties, and therefore being
held as unenforceable.
The general approach of the
Courts has been to uphold LD
clauses wherever possible. To
ensure the enforceability of LDs
in construction contracts, the
following legal and commercial
pointers have to be considered.
Where possible, the parties
should seek to agree the rate of
LDs to be levied upon breach.
This creates certainty for both the
employer and the contractor.
For the employer, there is
certainty that its right to deduct
or recover LDs is unlikely to be
challenged by the contractor as
a penalty, because the contractor
agreed pre-contract to the rate
of damages. Furthermore, as LD
clauses often act as a limitation
of liability, agreeing the rate of
LDs to be deducted provides a
contractor with certainty of the
extent of its liability for delay
under the contract.
The Courts recognise that it
is seldom possible to predict
accurately the level of losses
which may be incurred in the
event of the specified breach
occurring. Where the employer
makes a genuine attempt to put
a figure on the losses it may incur,
even if it later transpires that this
figure is incorrect, the Courts will
not generally consider the LDs to
be an unenforceable penalty.
An arbitrary figure for LDs
should not be applied. Losses
should be quantified by reference
to daily or weekly losses, or
calculated using a formula
where there is phased or partial
completion.
If sectional completion or partial
possession are contemplated,
LDs should be apportioned
between the completed sections
to ensure that any LDs levied
for a breach are reflective of the
sections of the works which are
in fact delayed.
It should be ensured that
the purpose of the LDs is to
compensate the employer in the
event of breach, not to coerce
the contractor into performing its
obligations under the contract. If
the Court considers the latter to
be the purpose, the LDs will be
unenforceable as a penalty.
Be aware of any specific
procedural steps, the giving of
written notices or time limits
set by the contract in relation
to claiming LDs upon breach. If
such conditions precedent to
recovery are not complied with,
an employer will be prevented
from claiming LDs.
An employer cannot claim
LDs where it has hindered
or otherwise prevented the
contractor’s progress.
Every possible consequence
of a contractor’s delay must be
considered to ensure that the
rate of LDs is reflective of the
losses which the employer may
incur upon breach – for example,
loss of rental income, the leasing
of alternative premises, etc.
For commercial reasons, an
employer may agree a rate of LDs
which is lower than the losses
it will incur as a result of the
contractor’s breach of contract.
For
contractors,
this
is
advantageous, since its liability
on delay will be lower than it
otherwise would be. From the
position of an employer, such
agreement is beneficial because
it creates certainty on the amount
of damages.
However, caution should be
exercised where a rate of LDs
lower than the employer’s
anticipated loss on delay is
accepted. LDs specified under
the contract are often construed
as an exhaustive remedy for
the contractor’s delay and may
therefore prevent the employer
from
recovering
general
damages, potentially leaving the
employer out of pocket as a result
of the contractor’s breach.
ce
Handling delay-related
problems and disputes
T
he complex nature of
construction
projects
means
that
disputes
between contracting parties are
somewhat inevitable, and one
of the most common disputes
arises from a contractor’s failure
to complete works on time.
Delay to completion can have
potentially far reaching and
costly consequences for an
employer, depriving it of the
use of the asset, loss of revenue,
rental income, and reputational
damage to the parties concerned.
A breach of contract, whatever
its form, will always entitle the
innocent party to bring an
action for damages. Common
law damages, also known as
unliquidated or general damages,
aim to put the innocent party in
the position it would have been
in had the breach not occurred.
To maintain a claim for common
law damages, an innocent party
must demonstrate a breach of
contract, causation and loss.
The court will then decide the
appropriate level of damages to
compensate for that loss.
Construction disputes are often
complex, resulting in parties
facing real difficulties in linking
losses with specified breaches.
Court proceedings to determine
the level of general damages to
be levied are commonplace, but
Pinsent Masons LLP is a full service international law firm with
over 1100 lawyers worldwide. Pinsent Masons has offices in the
UK, Munich, Paris, Ireland, Quatar, UAE, China, Hong Kong and
Singapore.
Pinsent Masons has over 200 lawyers specialising in international
construction and infrastructure development and is ranked by
legal directories as a leading adviser to the sector. The firm was
awarded Global Construction Law Firm of the Year 2008 to 2010, and
Infrastructure Team of the Year 2008.
■
For more information on any legal or contractual issue, please
contact Virginie Colaiuta at Pinsent Masons.
Tel: +44 (0)20 7490 6498
e-mail:
Creating the right contract provisions for dealing with projects
completing on time under English Law are discussed by
Elizabeth King
,
solicitor of Pinsent Masons in London.
