What are LADs?
Liquidated and ascertained damages (LADs) are a predetermined sum to be paid by the contractor/subcontractor as compensation to their employer if they breach the terms or obligations of their contract. In construction, the most common breach that these are applied to is a failure to complete the works by the agreed completion date. LADs are often included in the contract on a daily or weekly basis, for example, £1000 per day for each day after the completion date. They are also referred to as delay damages under NEC, however, for consistency I’ll refer to them as ‘damages’ from now on.
Why would damages be used?
The intended purpose of damages is to protect the employer from escalating costs, or loss of profit, resulting from a breach of obligations by the contractor. An example would be additional management costs associated with the project taking longer to complete. They are also used so that both parties are aware of their liability from the outset and to minimise the likelihood of requiring a third party assessment of compensation if the event of a breach.
When used to protect the employer against delays, it should be noted that these can only be applied after the agreed or revised completion date. Most construction contracts will include a provision for extending the original completion date via an extension of time (EOT) for events where the employer is liable. This means that the contractor will only therefore incur damages for delays that are their responsibility. For further information on delays and EOTs please see my previous article here.
The contractor/subcontractor must therefore keep sufficient records and update the programme regularly to enable them to substantiate any extension to the programme, otherwise run the risk of having damages applied unfairly. Any delays or expected delays should be notified as early as possible to allow mitigation measures to be adopted, where possible.
Protect your business and have them capped
Where damages have been included in a contract that you have been awarded, it would be prudent to propose that these are capped to a maximum value. This may be somewhere in the region of 10% of the contract value, meaning that the maximum value of damages that could be deducted from your payment by the employer is 10% of the contract sum. This is likely to be met with resistance from your employer though, as they will then effectively be liable for anything over and above that 10%. In the event there is a long delay on the project, this is likely to lead to significant additional costs for them with no further route of recovery. As always, any clause which seeks to limit liability for damages should be stated clearly and unambiguously.
As a subcontractor, it is likely that the damages you will be liable for will include both the client’s and main contractor’s costs i.e. the agreed level of damages between the client and main contractor plus the main contractor’s loss due to the delay. It is therefore even more important for subcontractors to negotiate a maximum liability.
You couldn’t make it up
It is also worth highlighting that damages must be a ‘genuine pre-estimate of loss’ for them to be enforceable i.e. the actual costs that will be incurred in the event of a breach. The employer can’t be viewed to be penalising the contractor by including a sum which is far greater than the employer’s estimated loss, otherwise this will likely not be upheld by the courts. This is a consideration for those preparing contracts with the intention of including damages; it would be worthwhile to keep a copy of the calculations you used to determine the sum.
That being said, if a value for damages has been defined in the contract and this was consciously agreed between the parties, then the employer is still entitled to deduct these damages even if it transpires that no loss was actually suffered by the employer.
There are also other mechanisms available that can be used to deduct monies from the contractor for poor performance e.g. low performance damages, KPI’s etc.
Absence doesn’t mean exemption
It would be reasonable to assume that in the absence of a defined value for damages in the contract, that these can’t be claimed by the employer, however, the opposite is more likely. If no damages are defined in the contract, damages may be deemed to be ‘at large’ meaning that the employer can seek to recover all losses resulting from the breach (depending on the wording of the contract). These are called unliquidated damages; they are not pre-determined, and they are not capped.
There are disadvantages to both the employer and contractor in this situation. Obviously, for the contractor, having unlimited damages could be costly and carries a high level of uncertainty. For the employer, not having an agreed, defined value in the contract means they will need to substantiate their claims for loss. This is much harder to do and will often be decided by the courts.
In my opinion, it makes more sense for the parties to agree on a reasonable figure at the outset and whether the damages will be capped at a maximum value. Both parties will then have more clarity on their liability in a delay situation. This is especially true where the loss proves difficult to estimate.
What’s hiding in the amendments?
As always with construction contracts, the devil is in the detail. You must check the amendments to the contract thoroughly and identify any changes to how damages are applied under the contract. I recently came across an amendment which allowed the employer to deduct damages immediately once the initial completion date had passed, with no responsibility to prove that the delay was the fault of the contractor. To recover any funds unfairly deducted, the contractor would have had to prove the responsibility did not lie with them. This is very onerous from the contractor’s perspective and shows why it is important to review the contract holistically.
Have you ever experienced a situation where you incurred damages? When negotiating the level of damages do you ask for substantiation from the employer? And do you seek to have these capped at a maximum value?
Please share your thoughts and comments.
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