Continuing our series on the basics of construction law, Andrew Keeley looks at the consequences of a liquidated damages clause being unenforceable

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Parties often agree to predetermine the level of damages that an employer is entitled to claim in the event of late completion. This benefits the employer, by avoiding the need to prove the actual losses it has suffered as a result of the delay. It can also benefit the contractor, whose liability for late completion is limited to the agreed rate of damages (known as liquidated and ascertained damages or LADs).

LADs clause struck down

If a court decides that a LADs clause is unenforceable for some reason, the clause will be struck down and the employer will not be entitled to automatically recover the agreed level of damages.

However, the employer will usually still be entitled to claim general damages in such circumstances. The aim of general damages is to put the employer, so far as money can, in the same position as if the contract not been breached and the works had been completed on time. However, there are hurdles to bringing a claim for general damages that do not apply to a claim for LADs:

  • The employer must prove both the amount of the losses it has actually suffered and that the losses would not have occurred but for the breach of the contract. In contrast, when claiming LADs the employer is entitled to the predetermined amount regardless of whether its actual losses are higher or lower.
  • The employer must establish that the losses were not too “remote”, meaning that the losses arose naturally from the breach or were within the reasonable contemplation of the parties when entering into the contract.
  • The employer has a duty to mitigate its losses and therefore cannot recover losses that could have been avoided had the employer taken reasonable steps to minimise its losses.
  • The damages may be reduced if the employer is partly responsible for the losses.

Do unenforceable LADs clauses limit the general damages recoverable?

To make matters worse for the employer, an unenforceable LADs clause may also limit the amount of general damages that can be recovered, depending on the reason why the clause is deemed unenforceable:

  • If the LADs provision is void for uncertainty, the level of general damages that can be recovered is not capped at the level of the unenforceable LADs clause.
  • If the rate of LADs is found to constitute an unenforceable penalty, it is possible that the employer’s claim will be capped at the level of the LADs clause. This was the position in the Court of Appeal decision in Jobson vs Johnson, where it was held that the penalty clause was not struck out, but the court would not enforce it “beyond the sum which represents the actual loss of the party seeking payment”. However, there is contradictory case law from the case of Steria Ltd vs Sigma Wireless Communications Ltd, where the judge found that the LADs clause was not penal but made non-binding comments that, if it had been unenforceable as a penalty, it could not in any way act as a cap.
  • The employer’s claim may also be capped at the level of unenforceable LADs if time has become “at large”, such that the contractor is no longer bound by the original completion date (for example, because the employer has delayed the works and there are no extension of time provisions in the contract).

Exclusive remedies clauses

The presence of an exclusive remedies clause may also affect the employer’s potential recovery if the agreed rate of LADs are found to be unenforceable.

Such clauses usually stipulate that the parties’ remedies for breach of contract are restricted to those expressly set out in the contract and exclude all common law remedies.

The courts have held that clearly worded exclusive remedies clauses will be enforceable. For example, in Strachan & Henshaw vs Stein and GEC, the Court of Appeal ruled that an exclusive remedies clause was enforceable even though it meant that the rights of the wronged party under the contract were worthless.

If such a clause was present in the contract, it could remove the common law right to damages in the event that the LADs clause is unenforceable, leaving the employer without any remedy at all for late completion.

One way to protect the employer’s ability to recover damages in such circumstances is to stipulate that the LADs are an exclusive remedy unless the LADs clause is found to be unenforceable, in which case general damages are recoverable.

Our next instalment in this series will review issues that can arise with liquidated damages clauses in subcontracts.

Andrew Keeley is a partner in the construction team at Charles Russell Speechly.