“No liquidated damages? No problem!” Or maybe not…
Building projects are often delayed. Whilst this may seem obvious, as building and construction lawyers, we are often confronted with disputes relating to projects that have been delayed. Often those disputes involve arguments about whether a principal can charge liquidated damages (at an agreed rate, calculated under the contract) or not. Less often, we are confronted with a principal who wishes to charge general damages, as opposed to liquidated damages at the agreed contractual rate.
Liquidated damages vs general damages
Typically, construction contracts provide that:
- The contractor must complete the works (for the purposes of this article “Practical Completion”), by a certain date (for the purposes of this article the “Date for Practical Completion”); and
- Failing which, the principal may claim damages (at an agreed contractual rate) from the Date for Practical Completion for each day up until the date upon which the contractor achieves Practical Completion (for the purposes of this article the “Date of Practical Completion”).
That is what is generally called “liquidated damages”.
Alternatively, a principal may be entitled to claim damages for the actual losses sustained by the failure of the contractor to achieve Practical Completion by the Date for Practical Completion.
That is what is generally called “general damages”.
How do they interrelate?
As may be obvious, liquidated damages are easier to claim, however there is always a risk that a claim for liquidated damages may not be enough to ensure that all of the principal’s losses are appropriately covered.
In that situation, can the principal claim general damages either in preference to, or in addition to, liquidated damages?
Unfortunately, there is not one rule for every case; however two factors generally weigh against the principal’s right to claim general damages for delay:
- Where the contract provides that the principal’s sole remedy for delay is pursuant to the liquidated damages clause/mandatory (by use of terms such as “shall pay”); or
- Where a particular sum (other than $Nil) is nominated for liquidated damages.
If either of the above exist, there is a general (not conclusive) presumption that general damages cannot be claimed by the principal.
Why do I care?
You’re not a principal, so why do you care? Simple:
- Because these same principles apply in relation to the contracts which you enter into with your head contractor/superior contractor and to the contracts which you enter with your subcontractors. As such, it is necessary to ensure that you appreciate what your principal can claim for, and that your subcontractors allow you to claim an appropriate measure of liquidated damages to ensure that you are not out of pocket;
- Because the corollary of the principal/head contractor/superior contractor being stuck with its claim for liquidated damages is that:
- A principal/head contractor/superior contractor is unlikely to “under club” in terms of the daily rate for liquidated damages;
- There is a strong prospect that such a party will nominate a rate which is higher (although not high enough to become a penalty) than the likely losses which will be suffered in the event of a delay;
- You will be required to pay liquidated damages at the daily rate, even if the principal/head contractor/superior contractor suffers no demonstrable loss as a result of a delay.
- Because principals/head contractors/superior contractors know that there is a prospect that there may be losses associated with delay which cannot be anticipated, and which have not been factored into the calculation of the daily rate for liquidated damages. As such, they usually insert a clause granting them a broad indemnity for any losses, howsoever occurring, including as a result of the delay.
So what can I do?
When contracting “up” (to a principal/head contractor/superior contractor) try to ensure that:
- The principal’s right to claim general damages is excluded by ensuring that the liquidated damages clause represents the principal’s sole remedy;
- The rate for liquidated damages is consistent with the losses which the principal/head contractor/superior contractor will suffer if your work is delayed (as opposed to the project itself being delayed);
- There is a cap on liquidated damages; usually 10% of the contract sum is an appropriate amount; and
- There are no clauses which provide the principal/head contractor/superior contractor with a broad indemnity which could be used to support a de facto claim for general damages over and above the claim for liquidated damages.
When contracting “down” (to a subcontractor) try to ensure that:
- Your right to claim liquidated damages is not expressed to be your sole remedy for damages for delay;
- The rate of liquidated damages is consistent with the rate that you will have to pay under any superior contract;
- Any cap on liquidated damages is consistent with the total amount which you will have to pay under any superior contract;
- There is a broad indemnity in your favour which could be used to support a claim in relation to any losses relating to the not covered by the liquidated damages clause.
A claim for damages associated with delay can be complicated. We urge you to obtain expert legal advice in relation to these matters as soon as possible (ideally before the issue arises).
Cornwalls’ Building and Construction team has extensive experience in matters relating to damages arising from delay. If you have such an issue, we have probably seen it before, and can provide you with strategic advice to assist you in achieving outstanding outcomes. Please contact the experienced team at Cornwalls.
 Leaving aside where the liquidated damages clause is considered to be the sole remedy for the principal, or where such a clause is “mandatory” the insertion of $Nil or N/A generally weighs in favour of the principal being entitled to claim general damages for delay.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.
For further information please contact the author or any member of our Building and Construction team.