Liquidated damages are a pre-agreed amount of money that is set out in advance in the contract that fixes the sum payable as damages if the contractor breaches the contract – typically by failing to complete the construction works by the completion date set out in the contract. Liquidated damages are not penalties but rather they are preset damages agreed at the time that a contract is entered into and based on a calculation of the actual loss likely to be incurred if the contractor fails to meet the completion date. Typically they are calculated on a daily or weekly basis.
Clauses to include liquidated damages are commonly used in construction contracts as a solution to deal with specified breaches to make the recovery of damages easier and quicker. Contracting parties are generally free to agree to whatever terms they like. However, the courts have refused to enforce liquidated damages which are deemed to be a penalty so it essential that sufficient care is taken before contracts are entered into to fully assess the potential costs of delays by the contractor while resisting the temptation to over-estimate them. Click here for an article by DAC Beachcroft about pitching damages at the right level.