Failure to complete work on time, often leads to liquidated damages or “LD’s” being applied, robbing you of any profit in the job and sometimes worse.
In a recent case, the contract provided that Practical Completion would not occur until, among other things, two sets of keys with approved plastic tags for each of the doors in the building had been provided. The keys were provided on time but they did not have “approved” tags. It was argued that this minor omission should result in liquidated damages of up to $59,000 a day.
The Court accepted this argument holding Practical Completion was not achieved despite the minor failure to deliver particular items specified in the contract, like the plastic tags.
In this article, we explain what you need to know and do in order to minimise the risks of liquidated damages being a major problem for you.
Most contracts that specify a time for completion also provide for liquidated damages, that is, a specified sum to be paid for each (usually) day the job is late.
Courts don’t like liquidated damages….much
Traditionally the Courts have been hostile to liquidated damages. However recently, the Courts have become less hostile to liquidated damages for two reasons:-
- At least in the case of contracts between commercial parties, the Courts have increasingly taken the view that where the parties agree to something they should be taken to know what they’re doing and should be held to their agreement.
- Secondly, liquidated damages clauses serve an important purpose. It can be very difficult for a party to prove how much they have lost as a result of a delay. Liquidated damages clauses are intended to be an agreement between the parties as to how much loss they anticipate will be suffered by the builder or principal if the job is late, so they do not have to go to the expense of proving what their loss actually is. This is particularly important when the contract is with a government entity, because government entities will find it very difficult to prove that they have suffered a loss.
That said, the Courts have developed two principles designed to control liquidated damages.
- The prevention principle; and
- The rule against penalties.
The prevention principle
The prevention principle says that where the delay on a job is caused by the conduct of the principal, the builder, agents or subcontractors engaged by the principal or builder, liquidated damages cannot be imposed.
Where the prevention principle is applied, time is “set at large”. This does not mean, as some think, that there is no time limit for the completion of the work under the contract. It means the work has to be completed within a “reasonable time”.
However, there are limits on the application of the prevention principle. The first step is that if the contract specifically provides for an extension of time to be granted where there is a delay caused by the principal, the builder or their subcontractors or agents, the prevention principle does not apply.
In that case it is for the contractor to apply for an extension of time in accordance with the clause.
The rule against penalties
The Courts will not enforce a liquidated damages clause if they consider it to be a “penalty”. A liquidated damages clause will be a penalty if the Court finds that it does not represent a genuine pre-estimate of the actual damages the builder or principal is likely to suffer if the job is delayed.
It is not sufficient to prove a LD’s clause is unenforceable as a penalty by simply say that the anticipated or actual cost of the delay is less than the liquidated damages. For the LD’s clause to be unenforceable the difference must be so much as to be extravagant and unconscionable.
And, the onus is on you to prove the amount of liquidated damages is a penalty. To do that you usually need access to the records of the builder or principal. So it is not always easy.
The case about the keys we referred to at the beginning of this article came down to the judge deciding that the liquidated damages clause was not a penalty.
Extensions of time
Contracts these days commonly provide that an application for an extension of time must be made within a certain period after the contractor knows there is going to be a delay or ought to have known there is going to be a delay. If the application is not made within that time period there is no right to claim an extension of time and liquidated damages are likely to follow.
If an application for an extension of time is not made within the time specified, there is usually no right to claim an extension of time.
It is a common failing of trade contractors not to make an application for an extension of time within the period provided in the contract. Failure to do so can lead to you having no way of avoiding liquidated damages.
Promises not to enforce LD’s
Don’t trust a verbal promise by your contractor that liquidated damages will not be imposed.
Whilst a Court will act on a verbal promise if it is found to have been made, proving a verbal promise can be a very difficult expensive exercise. So, get it in writing!
Tips for avoiding LD’s
So here are some tips to help you avoid problems with liquidated damages and extensions of time; –
- When you get the contract, read it carefully;
- Check the definition of “Practical Completion”;
- Check that you can apply for an extension of time;
- Note the timeframes within which you must give notice of delay;
- Know what information you need to supply for an extension of time claim and by when. (If the amount of information required is extensive and you have a short period of time to supply it, before you sign the contract, ask to change it so that you give the notice of delay within the short time frame but have a longer period to supply the information required);
- Do not rely on verbal promises that LD’s won’t be applied – get it in writing;
- If you are threatened with LD’s, look carefully to see whether the LD clause might be invalid as a penalty or because of the prevention principal;
- Make sure you comply with the timeframes and contractual requirements and make any application for an extension of time within the time allowed and with the information required.
Finally, never underestimate the damage the application of liquidated damages could do to your business. If you are threatened with liquidated damages a quick call to your lawyer could be a very worthwhile investment of your time and money.