Under a construction contract, a contractor is obliged to complete the works on time and if he fails to do so is liable to the employer for damages for breach of contract.Many building contracts provide for payment of a specified amount for such a breach and these payments are called liquidate and ascertained damages or LADs for short.
Such an arrangement is useful for both parties, as it allows them to know where they stand and both parties avoid the cost of arguing over just what the damages due would be: what loss had the employer actually suffered.
The law does not, however, permit LADs to be used as a punishment against the contractor.Consequently, LADs are only enforceable if they constitute a genuine pre-estimate of the loss or are a reasonable amount.Often, a genuine pre-estimate can be determined, even in relatively complex cases.For example, in the case a business obtaining new premises the estimated loss might- depending on the circumstances- include such elements as a lost deposit on fit-out contractors; lost deposit on movers; costs of alternative accommodation; and loss of profit from having no premises to trade from.On occasion, however, an estimate cannot be made, either because the potential damages are unknown or highly variable.If a genuine pre-estimate cannot be determined, then the parties have two options.The first option is not to use LADs, but to allow the recovery of ordinary damages, which would have to be proved.The second option is to use a reasonable amount as the amount of LADs.
How then can the parties be sure that they have chosen a reasonable amount?In the recent case of Azimut-Benetti SpA v Healey (which concerned the building of a yacht), the court decided that the court does not have "to form a view as to the maximum possible loss that the parties would have expected to flow from any determination of the contract and the extent to which the stipulated figure for liquidated damages exceeded that maximum possible loss", but was entitled to consider whether the amount was commercially justifiable and not intended to prevent the contractor from breaching the contract, but rather to compensate the employer should the contractor do so.
This means that if you are trying to agree a figure for LADs, where a geniume pre-estimate of the loss is not readily calculable, there are two keys points to bear in mind.First, the figure should be intended to compensate and not to be so onerous so as to be intended to prevent the breach occurring.Second, the figure should be genuinely negotiated.If these two tests are passed, then the LADs are likely to be enforceable.
For further advise on Construction Law please contact Graham Jackson
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