In October we outlined a brief glossary of general construction terms. A popular term is of course, liquidated and ascertained damages (LAD’s). Set out below is a summary of LAD’s which are a common way of dealing with delay in construction and engineering projects.
Most standard construction contract documents contain accepted LAD clauses with which most professionals in the construction industry are familiar. Such clauses usually confirm that if practical completion fails to occur by the completion date and no extensions of time have been granted, the employer will be entitled to charge a fixed sum of money for each day or week the project remains incomplete. The amount to be paid should be a genuine estimate of the loss which the employer will sustain as a result of completion being delayed.
LAD clauses enable the contractor and the employer to know in advance what the loss caused by the delay will be and aims to avoid the parties having to prove such costs and incur costs in doing so.
Below is a review of the approach taken by the courts to LAD clauses.
The general approach
In general the courts will allow an employer to recover his LAD’s. Court’s have shown a marked reluctance to interfere with commercial contracts and will only do so if the terms of the LAD clause are viewed as oppressive. Parties are therefore best advised to assume that the clause is enforceable because the fact that the figure looks a little high is most unlikely to persuade the court that the parties should not be bound by it.
That said, the courts will not stand by and allow parties to incorporate what are nothing more than penalty clauses disguised as LAD clauses into construction contracts. The very old but still recognised authority on this point is Dunlop Ltd v New Garage Co Ltd (1915). This case established the following principals:
(a) An LAD clause should contain a genuine pre-estimate of loss. It should not be a penalty or operate as some sort of threat. However, just because a provision is not a genuine pre estimate does not mean that it is automatically a penalty.
(b) The title of the LAD clause is irrelevant to its enforceability. Labels are irrelevant: a liquidated damages clause may even be labelled as a penalty clause and still be enforceable.
(c) The court will take account of all the circumstances of the particular contract and will be judged at the time the contract is made rather than at the time of breach in determining whether the sum in the clause constitutes a penalty. That is not to say that post contract events will not be relevant as they may serve to justify the sum stipulated.
Existing case law can assist us in deciding whether an LAD clause contains an unenforceable penalty or an enforceable and recoverable sum.
In Clydebank etc Co v Yzquierdo (1950) the court clearly stated that if the sum sought was nearly the largest loss that could be envisaged, it will not be recoverable. If the loss that would be sustained is known and the LAD sum is larger, then again the LAD sum will not be recoverable.
In circumstances where the LAD clause may or may not be viewed as binding, as a precautionary measure the contract should make it expressly clear that LAD’s are not the only or the exclusive remedy. JCT and other industry standard documents do make that the case. Parties should take active measures to avoid pinning all their colours to one mast. In the event that the LAD clause is the only remedy and it fails, there is a very good chance that there will be no other way of recovering loss irrespective of the actions of the parties.
Sectional completion
Sectional completion is where a party requires only part (or a section) of the site handed back to it on a certain date. Contracts with sectional completion dates have their own peculiarities. The losses related to each section must take account only of the losses that are related to the delay in obtaining that particular section. There must be an implicit acknowledgement in the LAD clause that losses vary depending on the section of the work concerned.
Again, a failure to provide accurate figures of estimated loss tailored to a specific part of the project that is delayed may result in the complete failure of the LAD clause. The courts will be strict when dealing with such clauses and will construe the wording of the clause against the draftsman or the party relying on them. It is also clear that where sectional completion has in practise occurred then the LAD clause will be unenforceable unless it has specifically catered for it.
It is not open to the claiming party to decide that it only wishes to claim a part of the LAD as a way of getting around the fact that sectional completion had occurred but had not been anticipated by the draftsman when the LAD clause was created. In this case the whole clause would fail.
Where it is, at the end of the day, impossible to assess a LAD figure then more than likely the court will accept that the LAD sum in the contract is appropriate and enforceable. The rationale behind that rule must be that if the court cannot decide what loss is appropriate then how can it decide that the figure in the LAD clause is inappropriate.
Top Tips
1. LAD sums must be a pre estimate of loss. Try to document the method used for its calculation in case it has to be shown to the court or indeed anyone else when it is used. Try where possible to show the calculations to the other contracting party in order that agreement can be reached that it is reasonable.
2. In contracts with sectional completion dates, LAD figures should be considered carefully and take account of each sections estimated loss.
3. LAD’s should never be drafted in such a way where they are a sole or exclusive remedy. (Temloc v Errill (1988) 39 B.L.R. 30).
If you have any concerns regarding construction related issues considered in the column, please contact Catherine Kay at catherinekay@georgedavies.co.uk or Mark Jones on 0161 234 8868 or email: markjones@georgedavies.co.uk
Disclaimer
The content of this article does not constitute legal advice. You should always consult a suitably qualified lawyer for professional advice about any specific legal matter of concern to you. George Davies Solicitors, its partners and staff do not assume any responsibility for information contained within this article and disclaim all liability relating to such information.
About George Davies Solicitors
George Davies was highly rated, in the North West, in nine different categories of the 2005 Legal 500 review and in Chambers and Partners UK Directory. They specialise in all aspects of commercial law and boast a substantial Property Department within which sits a niche Construction team with experience in a full spectrum of construction law services. The firm was commended in the Legal 500 for their strong movements forward in a variety of property and construction deals and Chambers specifically mention its achievements in Construction. The Head of Construction, Catherine Kay can be contacted on 0161 234 8861 or emailed at catherinekay@georgedavies.co.uk
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