liquidated damages contracts

Liquidated Damages Contracts & Specifications| 1

Contracts & Specifications

Liquidated Damages –

Who Bears the Burden ?



• Generally, LDs are an agreed upon sum of money to which the government / Owner will be entitled in the event the contractor fails to perform as directed in the contract.

• Most large contracts contain this provision• This provision explicitly states that for each calendar day the work remains

uncompleted after the final completion date stated in the contract, the contractor shall pay a certain amount to the owner

• These specified payments are intended as reimbursement for owner’s monetary loss due to delay

• They are called liquidated damages because they are stated as fixed rupee amounts per day

What are Liquidated Damages ?



• In many cases, the actual damages that owner will suffer in event of late completion is difficult to determine

• The owner & Contractor agree on a fixed daily rupee amount that is considered reasonable measure of the extent of damage in the event of late completion

• In public sector and in much private work, determination of rupee amount-unilaterally made by owner-bid advertisement on a “take-it-or-leave-it” basis

Conceptual Basis Of Liquidated Damages



In supply, service, research and development, and construction contracts:(1) The time of delivery or performance is such an important factor in the award

of the contract that the owner may reasonably expect to suffer damage if the delivery or performance is delinquent.

(2) The extent or amount of such damage would be difficult or impossible to ascertain or prove.

(3) The liquidated damages rate must be a reasonable forecast of just compensation for the harm that is caused by late delivery or untimely performance.

(4) Applicable LDs clause and rates should be identified in the solicitation. Rates should include an amount for other expected expenses associated with delayed completion. After award, LDs can be incorporated into the contract as a supplemental agreement, though it would be difficult to have a contractor to agree without objection.

When can they be used?



1. FAILURE TO COMPLETE :Failure to complete by a specified date is the most

common breach of contract for which LD clauses are used in the construction industry. The damages are usually expressed in Standard Forms as an amount per day or per week of delay to completion to be paid by the Contractor to the Purchaser.

2. FAILURE TO PAY :Failure to pay by a certain date is a breach of contract not

usually associated with liquidated damages clauses, but such a clause could provide for payment of interest at an increased rate for the period of delay.

Types of Liquidated Damages Clauses



3. FAILURE TO MEET PERFORMANCE CRITERIA : Failure to provide a plant which gives

the required throughput is the breach of contract for which LD clauses are used in contracts for industrial and/or mechanical plant. A measurable performance target is required. It may be necessary to stipulate a minimum level of performance required. If performance falls below this level the Plant may be considered and agreed no longer to be a viable plant, the LD provision no longer an adequate remedy and the contractor’s performance not to be performance at all.

Types of Liquidated Damages Clauses



Liquidated Damages: It is a sum fixed or ascertained by the parties to the contract, which is a

fair and genuine per-estimate of the probable loss that might occur as a result of breach of contract. Thus, liquidated damages are an assessment of loss which in the opinion of the parties will occur due to breach. Such damages are effective and recoverable by the aggrieved party from the other.Penalty:

On the other hand, penalty is the sum mentioned in the contract at the time of its formation which is disproportionate to the damages likely to occur as a result of the breach of the contract. Penalty is fixed with a view to getting the contract performed, but it has no concern with the probable loss likely to occur to the parties due to the breach of the contract.

Difference Between LD & Penalty



• Penalty is something which is used in a contract to secure the performance of the contract whose main purpose is to ensure the payment of money which is specified to terrorise the offending party.

• Also where the loss which has to be recovered is greater than the pre-estimated loss then it amounts to penalty. Whereas liquidated damages are compensatory in nature at the same time are pre-estimated damages. The purpose liquidated damages is to promote certainty especially in commercial field.

• Liquidated damages are based on the genuine pre-estimate of the loss, whereas penalty is based on the doctrine of reasonable compensation

• Hence, liquidated damages are easy to impose when compared with penalty.

Difference Between LD & Penalty



• Unexcused failure of contractor to meet specified date is a breach of contract

• If liquidated damages provision is not present and if contractor failed to perform, owners recourse would be to withhold money or sue, prove the extent of damages and obtain judgment compelling the contractor to pay

• Liquidated damages provision relieves the owner from above burden• Their effect is to substitute a contract remedy for a common law breach

remedy

Liquidated damages provisions are a contract remedy



• Both parties to contract must realize that liquidated damages are a contractually specified remedy to make owner whole in event of late completion

• Liquidated damages cannot be properly assessed as a penalty to punish contractor for any displeasing act or, when not properly due, as pressure to coerce the contractor into action favorable to owner

• In case of disputed liquidated damages assessments, courts will not support purely punitive or coercive actions on owner’s part

Liquidated damages are not a penalty



• Current Judicial attitude toward liquidated damages is to enforce such provisions in event of unexcused delay

• Courts usually consider liquidated damages if daily amount stated in contract is not reasonable

• Standard of reasonableness is based on whether daily amount is reasonable estimate, in light of level of knowledge possessed by owner & contractor when contract was signed

Judicial attitude towards liquidated damages provisions



• Liquidated damages provisions can’t be applied in reverse if contractor finishes early

• There need not be benefits from every day’s early completion because owner may not have planned to occupy in the event of early delivery or due to other reasons as well

• Occasionally bonus/penalty clause provides monetary benefit for early completion

• Daily rate for early completion is usually less than the rate for late completion

• Bonus/Penalty clauses - more commonly found in private sector contracts

Bonus/Penalty clauses



(1) acts of God or of the public enemy, (2) acts of the government in either its sovereign or contractual capacity, (Ex.

Untimely responses to contractor’s requests, improper inspections)(3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (contractor must show it acted reasonably)(8) freight embargoes, and (9) unusually severe weather.

Excusable Delays



A contractor must also demonstrate that: (1) the event was beyond the contractor's control (including that it was not

foreseeable at the time of contract signing); (2) the contractor could not have prevented the event; (3) the contractor could not overcome the effects of the event; (4) no contractor fault or negligence contributed to the event; and (5) the event caused a delay to the overall completion of the contract.

Excusable Delays



• Charles L. Knapp ,and Nathan M.Crystal 1987 ,Problems in Contract Law, Cases and Materials ,Second Edition , professor of Law New York University & South Carolina, p 967-971

• Lindsey, Susan 2005 , Business, international . 0003-8466 Architects' Journal. EMAP Architecture.

• Brian M. Samuels , Construction Law.• FIDIC,1999 , Condition of Contract for CONSTRUCTION.• INTERNET WEBSITES.• William G. Morris , an attorney , at 247 North Collier Boulevard on Marco Island.• Greenburg Traurig , January ,2008,Construction Law Litigation.• CHARLES S PHELLIPS,P.E.,1999 ,Construction Contract Administration, Society for

Minning, Metallurgy, and Exploration, inc.(SME),p 63.• Hinze, Jimmie, University of Florida, 2nd ED. P 214, 215

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