Liquidated v unliquidated damages
Construction contracts generally include a provision for the contractor to pay liquidated damages (or liquidated and ascertained damages, sometimes referred to as LADs) to the client in the event that the contract is breached.
Liquidated damages are a pre-agreed amount of money that is set out in advance in the contract, that fixes the sum payable as damages if the contractor breaches the contract - typically by failing to complete the construction works by the completion date set out in the contract. Liquidated damages are typically calculated on a daily or weekly basis.
Unliquidated damages are damages that are payable for a breach, the exact amount of which has not been pre-agreed. The sum to be paid as compensation is said to be ‘at large’ and is determined after the breach occurs by a court.
One of the advantages of a liquidated damages is that there is no need to prove the actual loss since the clause provides a pre-estimate of the damages to be paid. In addition to helping recover damages, this helps to provide certainty to the parties.
The advantage of unliquidated damages is that it allows for recovery of losses which may have been impossible to foresee or to estimate with any certainty before the breach.
If the contract contains an applicable liquidated damages clause, the client is generally not permitted to disregard and claim unliquidated damages instead.
In standard form construction contracts, parties will sometimes insert ‘NIL’ or ‘n/a’ for the rate for liquidated damages, if they do not wish to claim liquidated damages, however, this can imply that losses for unliquidated damages are also nil. If parties wish to exclude liability for liquidated damages, they must state this clearly in the contract to avoid ambiguity, either stating that unliquidated damages apply, or deleting the clause altogether.
[edit] Related articles on Designing Buildings
- Breach of contract.
- Collateral warranty.
- Completion date.
- Damages in construction contracts.
- Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd.
- Liquidated damages.
- Measure of damages.
- Penalty.
- Practical completion.
- The distinction between liquidated damages clauses and penalty clauses.
- Unliquidated damages.
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