What are liquidated damages?
Liquidated damages clauses are common in many building and construction contracts, as well as in other types of commercial contracts. They usually state an agreed-upon amount of money that parties to a contract promise to pay if one party breaches the contract. The purpose of such a clause is to compensate the injured party for the breach, and not to punish the party in breach. It enables both parties to know upfront what damages they will be accountable for in the event of a breach of contract. However, this amount can often be quite high and therefore you must be careful when signing a contract with such a clause.
Liquidated damages in construction and building contracts:
In construction contracts, liquidated damages will most often apply when a contractor fails to bring the scope of work to the stage of practical completion within the specified contract period. A contractor may still be liable to pay liquidated damages even if the delay in completion was not their fault. Building and construction contracts almost always contain clauses allowing the contractor to an extension of the contract period in certain circumstances. In such cases, the date for practical completion is moved back by the agreed time and liquidated damages are not calculated until the date the work is to be completed has passed. However, a contract may provide a specific clause which requires the contractor to fulfill certain conditions for the extension of time to be valid.
Liquidated damages are usually calculated at a daily rate with a formula stated in the Schedule to a contract and can often be at a very high rate. Before signing any contract with a liquidated damages clause, it is important to take note of the rate at which liquidated damages will be calculated and whether it seems fair and reasonable.
Liquidated damages clauses can be useful in that they give a clear indication of what will be owed by the contractor if they fail to complete the scope of work on time and can also provide an incentive to complete the work on time. However, we do not live in a perfect world and there may be many unexpected circumstances which arise that prevent the scope of work being completed on time. Therefore liquidated damages clauses must be treated with caution as a contractor may find themselves liable for a large sum of money if there is a delay in completion.
If you would like some advice on including liquidated damages clauses in your contracts or some advice on liquidated damages clauses contained in contracts that you are exposed to, then please email us at email@example.com or call Marcus Ahern on 9335 8888.