Here’s what we know about Liquidated damages (LDs). Firstly, they are also known as liquidated and ascertained damages (LADs). The basic principle appears to be that they exist to bring certainty. Usually this is in the case where there might otherwise be a court battle over an amount due for poor performance under a contract.
LDs represent a defined sum, often for hard-to-define losses to one party such as the delay to completion of a project. They are a provision that allows for the payment of a specified amount, bringing certainty, should there be a breach of contract. The NEC form of contract often refers to liquidated damages as ‘delay damages’.
The inclusion of an LD clause can provide clarity and certainty following a breach of contract. These damages are deducted from the amount payable to the damaging party.
Courts usually require parties to assess the liquidated damages clause at the time of contract signing. This means there is already a set compensation amount that both parties have agreed to. By having an LD clause in place, the court and involved parties can save time and money. The implementation of this clause also helps to avoid messy legal disputes.
Usually, a client must notify the contractor if they plan to deduct liquidated damages. In a JCT contract, this must be no later than 5 days before the final date for payment of the final certificate.
Note also the outcome of two parking cases in which an argument around a ‘genuine pre-estimate of loss’ v penalties were discussed: https://en.wikipedia.org/wiki/Cavendish_Square_Holding_BV_v_Talal_El_Makdessi