Liquidated damages refers to which of the following

1.16.1 Plans for Lump Sum and Unit Price Contracts

(a)

Bonus/liquidated damages plan (a schedule incentive plan) established in the bid invitation or as a result of negotiations before or after contract award. The contractor receives a bonus for meeting or beating the target completion date(s) or the contractor pays liquidated damages for late completion.

The bonus plan generates payment only for early completion of the established critical contract schedule milestones.

Should the contractor fail to complete the work within the time stated in the contract (either the completion of the entire contract or the achievement of milestones), then the client would be entitled to deduct from the contract price a sum equivalent to ____ percent of the contract price per day or part thereof as liquidated damages up to a maximum of ____ percent of the contract price.

It may not be immediately apparent but there is a benefit to the contractor in having a definition of the amount of liquidated damages in the contract and this is the quantification of its liability. If there is no definition of the amount of liquidated damages (and not all contracts include this clause) and the work is not completed in the time stated in the contract, the risk for the contractor is that subsequent damages may be unlimited. If, however, the parties agree beforehand on the level of damages to be paid by the contractor in the event of lateness (i.e., liquidated damages), then those liquidated damages become due in the event of lateness, irrespective of the actual loss suffered.

Liquidated damages (or ascertainable liquidated damages)

Liquidated damages have been defined by Lord Dunedin in a court case in 1913 as ‘a genuine covenanted pre-estimate of damages’, and as such is the compensation payment by a vendor to a purchaser when the goods are not delivered by the contract date. In cases of subcontracts, liquidated damages can be imposed if the contract is not completed by the agreed date.

Liquidated damages are not penalties. They are primarily designed to cover the losses suffered by a purchaser because the goods or services were not available to him by the agreed date. As the amount of liquidated damages was agreed by both parties in advance, the purchaser does not have to prove he has lost money. The fact that the goods are late is sufficient reason for claiming the damages.

Over the years, however, liquidated damages have been assessed in quite an arbitrary way that bears no relationship to the losses suffered. Usually, they are calculated as a percentage of the contract value and vary with the number of days or weeks for which the goods have been delayed.

In most cases, the Courts will uphold such a clause, provided the actual amount of liquidated damages is less than the amount that could have been realistically shown as the loss. It is argued that both parties knew at the time of signing the contract that the loss would probably be greater, but agreed to the lower figure. If, on the other hand, the amount is greater than the real loss and the vendor could demonstrate to the Courts that the purchaser was, in fact, imposing a penalty, then the clause would not be enforceable.

A normal figure used for assessing liquidated damages is 0.5% per week of delay with a maximum of 2.5%. This means that the vendor's maximum liability becomes operative after a 5 weeks' delay and is limited to 2.5% of the contract value. If the purchaser does not really need the goods, even after 5 weeks' delay, he can still claim his 2.5%, which is, in fact, pure profit. On the other hand, if, because of the delay of one item of equipment, the whole plant remains inoperative, his losses could be enormous. The receipt of a miserable 2.5% of the value of one relatively small item is insignificant.

It can thus be seen that the real purpose of liquidated damages is to encourage the vendor to deliver on time, since a loss of 2.5% represents a large proportion of his profit. It is quite naïve to suggest that the vendor should pay the true value of a loss that could be suffered by a purchaser, which could be many times greater than the cost of the goods in question.

If no liquidated damages clause is included in the purchase order, the purchaser may claim damages at large, and may, indeed, recover the full, or a substantial proportion of the full amount of his loss, due to the goods being delayed. For this reason, many vendors actually request that a liquidated damages clause is inserted so that their liability is limited to the agreed amount.

For large subcontracts, it is prudent to produce some form of calculation for assessing the amount of liquidated damages, as if they are challenged, they must be shown to be reasonable. There are a number of ways, these can be assessed:

If the whole plant was prevented from producing the desired product, the loss of net profit per week of production can be used as a basis.

If the works are nonprofit earning, such as a road or reservoir, the additional weekly interest payment on the capital cost is a realistic starting point.

If the delayed items hold up work by another subcontractor, the waiting time for plant and additional site overheads are considered as real losses. To these could be added the standby time of labour, if it cannot be redirected to other work.

Liquidated damages may be imposed on the total contract or on sections. This means that the late delivery of layout or even final drawings could be subject to liquidated damages. The amount of these damages could easily be calculated as the man-hours of waiting time by engineers being held up for information.

After all these calculations have been produced, the total value of the damages must be compared with the contract value of the goods. If the amount is high in relation to the contract value, it must be reduced to a figure that a vendor can accept. At the end of the day, if the purchaser requires the goods, he must find a vendor who is prepared to supply them.

3.3 Rule of treaty violation

The rule of treaty violation is for situations when selling or buying is unavailable. The violated treaty one needs to pay the liquidated damage Aldtrade(t), the liquidated damages can be used to trade further. If the seller violates the treaty, the liquidated damages will be set as to equal to the energy price of the utility grid, and the loss of the buyer can be minimized; and if the buyer violates the treaty, the buying money is still required. The liquidated damages can be presented as

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An after-the-contract-completion-date concurrent delay argument

As stated earlier in this chapter, a contractor may wish to rely on a concurrent delay argument as a reason to convince an owner to not assess liquidated damages for a contractor-caused delay. An example of such an argument is when the owner is responsible for a noncritical delay after the project’s contract completion date, which is illustrated in Fig. 7.34.

Fig. 7.34 depicts the project’s March Update. The data date of the March Update is April 1, 2017, which is represented by the vertical blue (dark gray in print versions) line. All of the activities located to the left of the data date are completed or as-built and indicated as blue (dark gray in print versions) bars. The activities located to the right of the data date are planned. The project duration is represented by the shaded area on the bar chart portion of the printout and shows that the project’s contract completion date is April 10, 2017. The example project includes two work paths. The first work path consists of Acts. A, C, and E, which is the project’s critical or longest path, and which is forecasting that the project will finish on May 15, 2017. This path also has a total float value of −35 days because the project’s contract completion date is April 10, 2017 and the May 15, 2017 forecast completion date is 35 days later than the April 10, 2017 contract completion date. The other work path consists of Acts. C, D, and E. Act. D, which is the last activity in this work path, is forecast to complete within the contract duration. In fact, Act. D is forecast to finish on April 10, 2017, which is also the project’s contract completion date, and, as a result, Act. D has a total float value of 0 days. For the purposes of this example, let us assume that the contractor was responsible for the forecast late finish of work path A, B, E on May 15, 2017. In this example, the owner would assess 35 days of liquidated damages based on the contractor’s delay to Act. B, which was the cause of the 35-day project delay.

Next, let us assume that during the month of April, Act. B progressed as expected, but Act. D did not. Fig. 7.35 depicts both the March and April Updates.

In the April Update, note that the data date moved to May 1, 2017, and the project’s forecast completion date remained May 15, 2017. As such, the project was not delayed during the month of April. However, Act. D did not finish as expected on April 10, 2017. In fact, it made no progress in April and is now forecast to finish on May 10, 2017. As a result of Act. D’s lack of progress in April, its total float value is −30 days. Let us assume that the delay to Act. D in April was caused by the owner.

In circumstances, such as those depicted in Fig. 7.35, the contractor might assert that, because the owner’s 30-day delay to Act. D occurred after the contract completion date, the 30-day owner delay relieves the contractor of responsibility for 30 days of liquidated damages. This position would be taken despite the fact that this 30-day delay was not a delay to the project’s critical path. In essence, the contractor is asking the owner for a 30-day time extension due to a noncritical delay.

There are at least two reasons why the contractor’s request for a time extension should be denied. First, the contractor’s delay was not critical. In accordance with the CPM theory and the primacy of delay concept discussed earlier in this chapter, the contractor’s delay simply consumed float. The contractor cannot dispute that it was responsible for delaying the project 35 days well before the owner delayed noncritical work.

In this case, the contractor’s position has many flaws, perhaps the most significant flaw being that it conflicts with the most basic tenet of CPM scheduling, which is that only delays to the critical path of the project will delay the project’s completion. In recognition of this fact, nearly all well-written construction contract time extension provisions state that “the contractor is only entitled to a time extension when an excusable delay affects the critical path and delays the project completion date.” Because the contractor is seeking a time extension for a noncritical path delay, the contractor is not entitled to a time extension or to relief from liquidated damages.

19.1.5 Liability

The exact nature of the supplier's liability must be spelt out, including the maximum penalty that can be incurred. It is often the case that contracts will contain a clause stipulating that liquidated damages are to be payable upon non-performance or breach. In principle the amount of damages should be a genuine pre-estimate of the losses that would be experienced by the injured party upon such an event. The amount then is representative of genuine loss and thus the damages payable are deemed as compensatory and not punitive. The supplier should be aware of the amounts stated and how they are made up. This ensure that the claimed values are not disputed in the event of a failure to achieve the required performance, and resultant breach of contract.

If some qualifying or guarantee period is involved it is necessary to define when this commences and when the supplier is free of liability. The borders between delivery, installation, commissioning and operation are often blurred and therefore the beginning of the guarantee period will be unclear.

It is wise to establish a mutually acceptable means of Alternative Dispute Resolution (ADR) in case the interpretation of later events becomes the subject of a dispute. ADR can be achieved in a number of different ways but is usually done through mediation or arbitration. Whilst mediation is a less formal approach, whereby the parties in dispute are helped to achieve an amicable settlement by a mediator, arbitration is a formal process and is controlled In England and Wales by The Arbitration Act 1996.

If part of the liability for failure or repair is to fall on some other contractor, care must be taken in defining each party's area. The interface between equipment guaranteed by different suppliers may be physically easy to define but there exists the possibility of failures induced in one item of equipment owing to failure or degraded performance in another. This point should be considered where more than one supplier is involved.

8.23 Liquidated damages and loss and/or expense

This is an aspect of a contract which should not be contemplated by either party at the outset of a contract. However, it is common for the client to set a figure for liquidated damages, which he considers that he will genuinely lose if the contract is not completed on time, and should not be confused with a penalty clause, which is for punitive damages.

The expression non-liquidated damage means actual losses, which are incurred by a client, and could be claimed in the absence of an agreement to a specific amount in the contract. Loss and/or expense can be suffered by a contractor due to other parties who caused him to be delayed. These sums per week are invariably far in excess of any liquidated damages amount set in the contract.

In practice, what happens is that where a contract is falling behind program the contractor will apply to the client for an extension to his period for completing the works. Should the contractor not make an application then he will be in breach of his contract to complete the works by the date agreed, and the client can claim liquidated or non-liquidated damages as a result. Where no specific dates for completion have been set, in a dispute situation, the court will set a date which, under the circumstances, was or ought to have been in the contemplation of the parties at the outset of the contract. For example, a firm agrees to supply and install a machine, and while no particular date is set for installation, the firm knows that production would be affected badly if it was not installed within three months. Without extenuating circumstances prevailing, the firm could be in breach of its contract if, say, the machine was not installed within three months.

The contract could include a penalty clause for non-completion by the contractor, and paid by him, as well as a bonus clause paid by the client to the contractor in the event that he completes his contract on or before the agreed completion date. This bonus clause can be on a reducing scale (say, from 75 per cent of the time onwards).

Liquidation of the contractor has nothing to do with liquidated or non-liquidated damages, although these can still be claimed to a company in liquidation. Some forms of contract, such as the JCT form, make provision for automatic determination in the event of a firm going into liquidation but that the contractor may be reinstated under certain circumstances.

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