REALWorld Law



Is it possible for the parties to a construction contract to agree that the time/date for completion of the works is to be fixed? How would delay be dealt with?



Construction contracts typically require the works to be completed by a specified date. In some contracts, instead of the owner bringing a claim for general damages (compensation) for late completion of the works by the building contractor, the parties may agree that  the contractor will be required to pay 'liquidated damages'.

Liquidated damages are damages that are fixed and the amount is agreed by the parties in advance. A typical clause requires the building contractor to pay or allow the employer to deduct liquidated damages at a rate per day or week of delay in the completion of the works. The rate is usually set out in an appendix to the construction contract.

Contractual provisions for the payment of such sums are common in building contracts and favoured because:

  • in some situations, it can be difficult and costly to ascertain the actual loss suffered by the owner;
  • liquidated damages avoid the owner having to prove its loss by claiming general damages and avoid arguments over remoteness of damages;
  • the contractor is often keen to fix the level of its liability to the owner for late completion; and
  • liquidated damages provisions save the time and cost of litigating over the amount of such loss.

It is important to note that:

  • If included in a contract, liquidated damages may be the only remedy for delay available to the owner.
  • In order to be enforceable, liquidated damages must represent a genuine pre-estimate of the loss likely to be caused to the employer by the contractor's failure to complete on time. They cannot be punitive and if they are not a genuine pre-estimate, then they may amount in law to a financial penalty. A penalty will be unenforceable if it is also unconscionable or oppressive.
  • If the party claiming liquidated damages has contributed to the delay, they may be unable to recover liquidated damages.

Conversely, where delays are caused for reasons that are deemed to be the fault of the owner, it is common for contractors to be entitled to recover the direct damages they incur as a result.