Even when liquidated and ascertained damages are totally fair, they may seem like a contractor’s worst enemy – here’s an example why …
This is a case in which main contractor Dean & Dyball got on the wrong end of a delay and caught it in the neck for liquidated and ascertained damages (LADs). It then put up a fight, which I will tell you about in a moment. First, let me say this: it has long been the norm for building and civil engineering contracts to state the damages payable for each day that the project is late. Lawyers tend to explain what a good thing they are, because they let everyone know the exact sum to be shelled out and allow the contractor to foresee the precise consequences of delay.
This is rubbish. Contractors utterly loathe LADs, no matter what unlikely fancy dress you stick them in. They are a sword hanging by a hair directly above their head. Try to persuade any contractor that they are not penalties and you will fail. And knowing that late completion is going to snap the thread leads to all sorts of disputes. I reckon that the neon sign of “LAD” does more harm than good. Enough. Let’s look at the Dean & Dyball story.
The job itself was quite ordinary. The first phase involved building four retail units in Aberystwyth. The damages for finishing late were £12,000 a week. Phase two was the external works and an 87-space car park. The LADs for not hitting the date for that part was £1,500 a week “in addition to the above”. Phase three, “to complete the extended car park to provide a total of 195 spaces” carried £2,000 per week. Phase four was to fit-out a superstore vacated by Somerfield supermarket. The LAD was £7,000 a week. Got the idea? Lo, it came to pass that phase one was eight weeks late, but the architect awarded a four-week extension. So the “culpable delay” of Dean & Dyball was four weeks at £12,000 a week = £48,000.
Contractors utterly loathe LADs, no matter what unlikely fancy dress you stick them in. They are a sword hanging by a hair directly above their head.
Now comes the fight. It’s bad enough to get walloped for £12,000 per week at four weeks on phase one, but the four weeks lost there made Dean & Dyball four weeks late on phase two … that’s £13,500 a week. Then there was the same four-week delay for phase three … And, oh hell, the same four weeks on the supermarket refurb at £7,000 per week. That four weeks of delay cascaded down the phases because each could not start until the preceding one finished. Dean & Dyball called for its pipe, its bowl and its lawyers three.
The rule is penalty clauses are a no-no; the amount has to be a genuine attempt to pre-assess the loss likely to be caused.
Over the years there have been serious endeavours to kick LAD clauses off the pitch. Sometimes that happens, and Dean & Dyball had a real go. You see, if you can show that the LAD sum is actually a penalty, then it will be struck down as unlawful. The rule is that “penalty clauses” are a no-no; the amount has to be a genuine attempt to pre-assess the loss likely to be caused by late completion. Mind you, it can be agreed as a lower sum than the anticipated loss. It could even be “nil” . But it must never be an overblown amount.
Another useful attack is to argue that nobody can make head nor tail of how the LAD figure is supposed to work.
Dean & Dyball argued that the sectional completion schedule was void because there was no provision that addressed the impact of delays in phase one on the following phases. The argument failed in court. The opponent argued that once you take an arm’s-length view of the contract, it all made sense. The whole idea was a phased release of the site. The four units were to be built, ready for fit-out. At that point only, the car park for 87 cars could begin. The public would only be allowed in on completion of the car park, probably coinciding with completion of the fit-out. And once all this is fathomed you can see how the LADs “work”. It wasn’t a penalty, but I bet you can see why Dean & Dyball was willing to fight this one.
Making up or recovering its own “culpable delay” was probably difficult for the contractor on a job with such a tight programme. Clearly it thought twice about trying to get an improved extension of time. And in all fairness, you might see that four shopping units including a Somerfield store would be likely to bring in £13,500 per week rent … none of which would arrive if the building were late. So there was nothing unfair about the principle of an accurate LAD figure. It simply caused a lot of grief and got in the way of good building. That thread of horsehair is just up there … don’t look now.
Tony Bingham is a barrister and arbitrator at 3 Paper Buildings Temple