Liquidated and ascertained damage clauses for delays can see a contractor lose money - unless they can argue that the amount charged is a penalty and therefore unenforceable

Tony Bingham

I reckon that liquidated and ascertained damage (LAD) clauses for delay do more harm than good. The game goes like this: “Team Contractor”, at bid stage, is told that if he wins the job, but fails to complete on time, his bank account is raided to the tune of £xx per day, week, month, year. “Team Employer” has a permanent glint in his eye for nabbing that cash. It’s a pong in the relationship.

Often enough there is a dispute about extensions of time to win relief from the liquidated damages claim. Sometimes the clause is also argued to be a penalty and therefore unenforceable. All this brings much joy to the gamesmanship of dispute.

Henning Berg’s contract had a liquidated damages clause. And when he triggered it, there was a shout in opposition that it was nothing more than a penalty. Do you remember this chap? He was a soccer player for Manchester United and Blackburn Rovers - won 100 caps for his national team, Norway.

He became the manager of Blackburn Rovers last year.

His contract document said: “In the event that the Club shall at any time wish to terminate this agreement with immediate effect it shall be entitled to do so upon written notice to the manager and provided that it shall pay to the manager a compensation payment by way of liquidated damages in a sum equal to the manager’s gross basic salary for the un-expired balance of the fixed period assuming an annual salary of £900,000 …”

It was all signed up in November last and was to run to 30 June 2015. No doubt you noticed that the manager was on a salary not far short of a million pounds per year. And for that whopper of a salary the club expects you to win every game or rather expects players to win for you by obeying your expensive ideas.

Poor Berg, poor Blackburn Rovers: in 10 matches they won 1. So a mere 57 days into his managership, Blackburn Rovers sacked him. Berg, glum, brightened up when his lawyers told him he could claim “liquidated damages” in a sum equal to the remaining two-and-a-half years’ salary. It’s about £2.25m.

Blackburn Rovers decided to make a fight of it. The amount to be forked out was, they said, a penalty. The word “damages” in the phrase liquidated damages in a contract, means compensation for the loss suffered by the innocent party. The published agreed amount in the contract may not reflect the actual and accurate amount of anticipated losses. It only need be a genuine pre-estimate of the innocent party’s actual loss. But if it is manifestly intended to be in excess of true compensation, then it will be struck down as a penalty - an own goal.

The judge wouldn’t have it. You can only attack the LAD clause if it is a sum well beyond those damages arising out of a breach of contract. The fundamental rule for a breach is that it has to resemble compensation. It is highly likely that Berg’s £2.25m claim for two-and-a-half years wages is beyond compensation. But, and this is the key, Berg is not in breach of contract. The attack on the LAD clause doesn’t even get off the ground. The law says: “The clause was not a penalty clause because it provided for payment of money upon the happening of a specified event other than a breach of contractual duty by the contemplated payer to the contemplated payee.”

Blackburn Rovers and Henning Berg had agreed in their contract that Blackburn Rovers could at any time terminate their agreement with immediate effect and they also agreed that the sacked manager would be paid all the remaining salary he would otherwise have been paid up to 30 June 2015. It’s not as though Berg was in breach of contract.

It is not that he warranted to win all or any match. Presumably Blackburn Rovers was about to chance their luck with another new boy. They have the right to boot out the manager and agreed the consideration, the benefit payable.

In your building contract the LAD idea is entrenched. But if it were not there and you run beyond the intended completion date and failed to be awarded an extension of time you would pay reasonable actual losses. Comfy? Or do you prefer that sword of Damocles hanging by a hair?

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple