Liquidated and Ascertained Damages ("LADs") clauses are a standard feature in construction contracts. They require a contractor or sub-contractor to pay a pre-determined sum to the employer in the event of delay or other default. Not only do they focus parties' minds on completing projects on time but they offer a degree of certainty by defining contractors' liability in the event of a delay, potentially avoiding complex litigation. We look at key issues to be considered in assessing a claim for LADs and arguments which can be deployed in defending the same.
LADs – what are they?
LADs clauses provide for payment by the defaulting party (normally the contractor or sub-contractor) of a pre-determined sum of damages in the event of an identified breach. A standard LAD provision takes the following approach:
"If the Contractor fails to complete the Project by the Completion Date, it will pay to the Employer for each day of failure a sum of £5,000, subject to an overall aggregate amount of £300,000, as liquidated damages."
The sums can be paid over directly or by the employer withholding payment fees to cover the LADs.
The sums are calculated by reference to an estimate of the damage which might be suffered by the employer if a relevant breach occurs but it is not an actual assessment of loss after the breach. The estimate is calculated at the time of entering into the contract and is based on hypothetical outcomes.
How do LADs differ from general damages?
LADs are different from general damages - a court does not need to decide the appropriate level of payment to put the employer in the position it would have been in but for the breach. Therefore, the employer does not need to demonstrate any loss, it just needs to demonstrate that the LAD terms were breached. Nevertheless, the figure must be based on some realistic calculation of what loss would be suffered and, in setting the figure, it must be proportionate to the anticipated loss in question.
This represents both a benefit and a drawback to LADs. It means they are extremely efficient because both parties will have certainty on recovery of loss, something which cannot be said about court proceedings. It also sets a limit on the daily/weekly sum payable to the employer. Even if the employer's losses turn out to be more than the sums stated in the LADs, it will not be able to recover any more in respect of that breach through the courts. Of course, the opposite is true also and the employer may not have suffered any loss at all but will still be entitled to damages.
What do LADs cover?
Technically, LADs could cover any breach but common issues addressed in building contracts include the following:
The most common provision for LADs found in a building contract is for payment in the event of delay in completion of the project, sometimes referred to as "delay damages". These usually specify a day or week rate payable by the contractor whilst the project remains incomplete beyond the agreed completion date. LADs will only be payable if the delay is as a result of some action or inaction by the contractor.
These are usually found in large scale projects (for example, a power plant) and there is a need for a contractor to establish that a site is in working order by implementing certain pre-determined tests to secure performance. The contractor will have a period of time within which to try and achieve the desired outcome but will be liable for LADs for every day the tests are not passed.
How can a contractor defend claims for LADs?
There are several questions to consider in determining whether LADs are recoverable in law.
- Is the LAD provision a penalty? If the LAD provision is found by a court to amount to a penalty, it will not be enforceable. The starting point is that the LADs must represent a genuine pre-estimate of loss. Therefore, if the LAD clause is actually intended to act as a deterrent to the contractor from breaching the contract (as opposed to compensating the employer for its loss), it may be considered a penalty. The assessment is based on reasonableness - if the employer can demonstrate that the obligation to pay was calculated as being proportionate to the obligation that was breached, this is more likely to be acceptable. In Cavendish Square Holding BV v Talal El Makdessi (Rev 3)  the respondent had agreed to sell a controlling stake in a company to the appellant and to comply with various restrictive covenants. Breach of these covenants would result in LADs being triggered. If the relevant LADs were triggered, the respondent would not be entitled to receive the final two instalments of the agreed price and would also be required to sell his remaining shares at a reduced value. The Court decided that the LAD provisions were not penal in nature because the parties were best placed to determine a financial value representing the lack of loyalty by the respondent and his failure to comply with the restrictive covenant which had been breached. LADs were found to be payable. However, if, for example, the LAD for delay is a lump sum payable irrespective of how long completion is delayed, this is likely to be deemed a penalty. Contemporaneous evidence of the parties' commercial rationale for agreeing LADs will be relevant in this regard. And as confirmed in Cavendish, the extent to which the parties are negotiating at arm's length and equally balanced, informed and legally advised will be important factors.
- Is the LAD provision ambiguous? It may be possible to argue, if the LAD clause is ambiguous in any way, that uncertainty will be construed against the employer, rendering the LAD inoperable. For example, if the mechanism by which LADs are calculated is unclear, it could potentially be argued that it should not be upheld. However, courts are reluctant to read uncertainty into clauses unless it is a clear case. Therefore, in Buckingham Group Contracting Ltd v Peel L&P Investments and Property Ltd  the court decided it would construe the building contract to give effect to the parties' intentions on the completion date and what sum would be payable under the LADs, irrespective of any potential ambiguity. In that case, an employer engaged a contractor to carry out works under an amended JCT Design & Build Contract. The project was significantly delayed and the employer issued a 'Pay Less Notice'. The building contract contained a bespoke LAD clause and schedule which provided for damages to be payable for a failure to achieve certain milestone dates. The contractor argued that the LADs provisions were void as a result of errors in the clauses regarding the date of practical completion, the rates and the contract sum. The court decided that the LADs were certain and enforceable because it was clear what had been intended when the building contract was agreed.
- Has the employer complied with any contractual requirements? If the employer fails to adhere to any contractual mechanism set out in the building contract regarding LADs, then it may be possible to argue that its claim for LADs will fail until it has satisfied such conditions. For instance, JCT Standard Building Contracts set out clear steps which the employer must take before LADs can be recovered. If the building contract is bespoke, there may also be certain conditions precedent which must be satisfied before the employer can seek LADs.
- Has the employer prevented the contractor from carrying out the works and meeting the date of completion such that time becomes 'at large'? The term 'at large' refers to a circumstance where a delay to a Completion Date or deadline is as a result of the actions or inactions of the employer and the building contract does not include a provision to extend the deadline. Time will become 'at large' if the contractor is not entitled to seek an extension for performance in these circumstances and any associated LADs will be rendered void. However, in Severfield (UK) Ltd v Duro Felguera UK Ltd (No. 2)  the court determined that time was not 'at large' because an extension of time was available to the parties on the basis of the building contract. In that case, a sub-contractor brought a claim against a contractor for not having paid its final account. The contractor served a counter-claim for LADs and the sub-contractor sought to demonstrate that time was 'at large' as a result of the contractor's delays in providing contract design. The court did find that the delay was down to the contractor but found that the sub-contractor was entitled to have an extension granted.
Notwithstanding the potential arguments a defending party can deploy, the court is very slow to intervene in what it considers a valid provision for LADs given their aim is to provide the parties with clarity. The court was not sympathetic to the contractor in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Ors  which sought to argue that the employer's right to LADs was lost when the building contract had been terminated and should instead be considered as a claim for general damages. This was on the basis that the building contract stipulated LADs as being calculated by the difference between the actual and contractual dates of Take Over. The contractor argued that no LADs were payable because Take Over was never achieved. The court disagreed. Whilst it is correct that LADs do not extend beyond the date a building contract is terminated, the TCC found that a party's accrued rights on termination are preserved and that it would defeat the purpose of LADs if they were void by virtue of the contractor's failure to complete the building contract.
LADs are a means by which parties to a building contract can deal with straightforward breaches without the need for protracted litigation which would otherwise further jeopardise the completion of the project. There are, however, rules which must be followed by the employer in seeking to agree and recover LADs. Contractors and their insurers should review claims for LADs carefully to ensure those rules have been followed. If not, there may be scope for arguing that LADs are not recoverable.