Construction law terms: general and liquidated damages

This guide examines the meaning of both terms, explains important differences, looks at how these differences have been illustrated in recent case law and offers some key practical takeaways.

Liquidated damages

Liquidated damages (LDs) are commonly defined as a “fixed or agreed sum, that shall be paid as damages for some breach of contract”. In practice, and a good example of a ‘belt and braces’ approach, some contracts also refer to them as ‘liquidated and ascertained damages’ (LADs).

LDs are used as a contractual term relating to delayed completion of construction works. LDs provide for the payment of a specific and pre-determined amount, in the event of late completion. LDs can, however, also relate to obligations other than time, such as the obligation to provide a programme.

General damages

General damages (GDs) are a more commonly recognised form of damages for any breach of contract claim, including delayed completion. If GDs apply, if a contractor or subcontractor completes the works after the contractually required date, then the contractor or subcontractor would generally be liable for GDs for the actual losses caused by that delay.

That liability would however be subject to usual contractual damages requirements such as foreseeability, remoteness and the duty to mitigate loss, for example.

Differences between liquidated and general damages

For LDs to apply, specific drafting is needed in the contract. In the absence of any – or any enforceable – express LD provisions, then GDs will apply to late completion. In that sense, GDs are the legal ‘default’, which applies unless express LD provisions are drafted into the contract.

Read more in our construction law terms series

• Construction law terms: design development and design change
• Construction law terms: termination at common law and under contract
• Construction law terms: claims under contract vs breach of contract claims
• Construction law terms: assignment and novation
• Construction law terms: contractual notices and condition precedent notices
• Construction law terms: set off, abatement and counterclaims

The amount of LDs has to be agreed and properly incorporated into the contract before it is signed. By contrast, the amount of GDs will not be known until the delay has actually occurred and the amount of loss caused as a result of the delay been suffered. As a result, LDs are often a pre-contract estimate of likely, but not actual, losses. The amount of actual loss suffered may thus be greater or less than the amount of those LDs.

LD provisions are typically found in main contracts and are much less common in sub-contracts. This is perhaps surprising given the difficulty of proving that one particular late subcontractor causes a whole project to overrun; and the greater willingness of the courts to enforce LD provisions provided that they are ‘commercially justifiable’.

When a contract contains an LDs provision, and that provision is found to be enforceable, liquidated damages will usually be an exhaustive remedy. A claiming party cannot claim more than the LD level simply because their actual losses are much greater.

To claim GDs, the injured party must prove that the other party’s breach caused the loss it suffered. This is typically determined by the courts, or any other chosen method of dispute resolution between the parties.

GDs will have to comply with usual contractual damages claims requirements – such as foreseeability, remoteness and the duty to mitigate loss. This does not apply to LDs, which provided they protect a legitimate commercial interest and are sufficiently clear and certain, will be enforced.

Although not always the case, in practice often LDs are ‘capped’ at a certain level or period, whereas GD for delay are not. GDs are however sometimes subject to an overall liability cap.

Case law on general and liquidated damages

2015 El Makdessi and ParkingEye cases

While this was not a construction case, it did contain an LD provision as to the amount by which a share sale price would be reduced if the seller breached restrictive covenants. The seller breached those covenants but argued that the LD provisions were punitive and therefore unenforceable.

A similar argument was raised in the ParkingEye case, where Mr Beavis appealed a decision relating to a parking charge of £85, for overstaying the permitted period of free parking. Mr Beavis argued that the charge was a penalty, rather than a genuine pre-estimate of the parking company’s loss - and was thus unenforceable.

In deciding both cases jointly, the Supreme Court determined that the test to distinguish that which is a penalty from that which reflects a genuine pre-estimate of loss is whether the provision “imposes a detriment out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”

In effect, the court held that in deciding whether an LD clause is punitive, it must be shown that the relevant clause is extravagant, unconscionable, or otherwise out of all proportion to the legitimate commercial interests of the innocent party. However, there is no automatic presumption that a clause is penal simply because the damages it provides for may be greater than any actual loss.

2021 Eco World case

Eco World was a property developer that engaged Dobler for façade and glazing works for new residential blocks. The works were not divided into sections. However, Eco World was entitled to take over part of the works prior to practical completion of the whole project, and was entitled to LDs for late completion – subject to a LDs cap.

When the works were not completed by the completion date, Eco World took over the unfinished part. Interestingly, it was Eco World that argued that the LDs were unenforceable. Contrastingly, Dobler argued that the LDs were valid, or, if invalid, it provided a cap on the liability for GDs. This illustrates the point that, LDs provisions can work in favour of either party.

Applying the El Makdessi case above, the judge found that the LDs provisions were enforceable because the contract provided for partial takeover of the works even without any mechanism for reducing the level of LDs payable. The LDs clause was not extravagant, exorbitant, or unconscionable.

Following El Makdessi, courts are far less likely to find an LDs provision to be penal, and instead will seek to enforce the contract as negotiated, particularly where both parties can negotiate their respective positions.

2021 Triple Point case

This case concerned commodities trader PTT, which sought LDs for delays to works under a contract with a software company called Triple Point. Following considerable delays, and various disputes over payment, Triple Point suspended work. PTT argued wrongful suspension and terminated the contract.

Triple Point brought proceedings for payment of unpaid invoices, whilst PTT counterclaimed for, amongst other things, LDs for delayed completion of the Works, up to the date of termination.

The Supreme Court overturned the earlier Court of Appeal judgement, and held that LDs are payable even where works were never completed, or accepted by the employer. The Court of Appeal’s determination that works needed to be completed for LD provisions to apply was “inconsistent with the commercial reality and the accepted function of liquidated damages”; and LDs accrue up until the point of termination by the employer, and not until the works are completed by the new contractor. Post termination, GDs apply.

Key takeaways

LD provisions are difficult, given recent case law, but not impossible to overturn in practice. LDs bind both parties and are usually an exhaustive remedy for delay – so think carefully of different scenarios caused by project delay and the losses delay to completion could cause before agreeing the amounts for LDs.

Particular care should be given to ensure the pre-determined amount is not extravagant, unconscionable, or otherwise out of all proportion to the legitimate commercial interests of a party – otherwise it is likely to be a penalty and unenforceable.

Consider whether the certainty of a pre-agreed compromise for LDs would be better or worse than proving actual delay losses as GDs. For example, given law changes encouraging enforceability, LDs might be a better solution in subcontracts on multi-trade projects than GDs.

Think carefully about the relationship between delay, LDs and provisions such as caps on liability, rights to terminate, partial possession and certification of completion. They might not all work in practice as intended.

Both parties should be aware of the enforceability of an LD provision. As seen in the Eco World case, it is not necessarily always in the employer’s interest for the LD provision to apply.

Co-written by Naveed Hanif of Pinsent Masons.