Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?
These are very common in both public and private construction contracts.
In public procurement, they are capped on 5% of the contract price (Royal decree of 14 January 2013 on the general rules of performance of public procurement contracts). In private construction contracts, the same mechanism can be found and a cap may or may not be established by the parties.
Such clauses are often called penalty clauses (“schadebeding”, “strafbeding”, “vertragingsboetes” / “clause pénale”) but are not to be mistaken for penalties under common law. In fact, these clauses are only enforceable if they are ment to compensate the other party for losses due to the breach of contract. If the real intent is to benefit from the other party’s breach of contract, such clause will prove unenforceable (cf. articles 6 and 1131 of the Civil Code).
Yes. See [question 2] on liquidated damages.
Most construction contracts in Denmark include delay liquidated damages provisions. AB 92/ABT 93 states that no additional claims arising out of the delay can be made in excess of the agreed liquidated damages. If liquidated damages have not been agreed upon, damages will be calculated in accordance with general principles of tort.
The courts and arbitration tribunals in Denmark generally uphold provisions on liquidated damages, provided that the employer has notified the contractor of the delay and that liquidated damages will be claimed as a result thereof. Under some circumstances, arbitration case law sets out stricter conditions for claiming liquidated damages.
Yes, if they are agreed in the contract.
As mentioned above, there is no standard form for construction contracts in Indonesia for privately funded construction contracts. We note that it is common for construction contracts to include delay liquidated damages.
Delay liquidated damages in principle is recognized in Indonesia and there have been instances where contractual provisions on delay liquidated damages are upheld by the courts.
However, please note that case law is not mandatorily binding in Indonesia legal system and therefore each claim for delay liquidated damages will be considered on a case-by-case basis.
For construction contracts funded by APBN, we note that the standard form of Ministry of PWPH contain provisions on delay liquidated damages.
It is common that Employer imposes liquidated damages to contractors for delay in the milestones or if the date of completion is not reached.
In recent years, in public and private contracts. a retention/liquidated damages provision has been used. This means that each month there is a comparison between expected works and performed works. The Employer is able to establish a retention on the delta (difference between planned and performed) per month. However only in the case that the final completion date is not fulfilled, liquidated damages shall apply.
Liquidates Damages in Mexico are similar to the US penalty. This, is that in the contract parties determine a specific amount that will be paid by the party that breaches the obligation. This is absolutely legal. The only limitation is that the amount agreed for liquidated damages does not exceed the obligation that is subject to liquidated damages. For example if the value of an obligation under a contract is 100, liquidated damages cannot exceed 100, but a percentage of 100.
It is important to note that Colombian legislation also foresees the possibility of contracting the use of penalties for delay in the termination and the penalty clause to guarantee compliance with the agreed contractual terms.
Contracts may contain delay liquidated damages provisions. Such are upheld by the courts to the extent they are reasonable.
Australian construction contracts commonly contain liquidated damages provisions for delay and (less frequently) for inadequate performance. Such clauses usually provide for a rate per day or per week (often subject to an overall cap), with the rate representing the additional costs and losses likely to be incurred by the principal.
The decision of the High Court of Australia in Paciocco and Another v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569 at , confirmed that in enforcing liquidated damages clauses the Court will take into consideration the wider commercial circumstances in which parties entered into the contract and whether the liquidated damages protect a legitimate interest, consequently restricting the potential for challenges to liquidated damages as a penalty.
The NS contracts have daily penalties with a total limit of 10 % of the contract value.
The provisions are generally upheld by the courts, a highly unreasonable liquidated damages provision may however be set aside or modified.
Almost all construction contracts in Sweden contain liquidated damages clauses. Such clauses are valid under Swedish law and are generally upheld strictly in accordance with their terms. Swedish law recognises that liquidated damages may have both compensatory and penalising (or incentivising) purposes. Owing to the strong principle of freedom of contract, a Swedish court or arbitral tribunal would only in exceptional circumstances modify or set aside a liquidated damages clause in a commercial contract. The Swedish Supreme Court has stated in a case, where it upheld a liquidated damages clause despite the fact that the works could not be taken into operation due to the delay of other works by other contractors, that Section 36 of the Swedish Contracts Act (which is a clause that can be used to modify or set aside contract terms that are deemed to be unconscionable) can be used in exceptional cases if the employer is over-compensated. If the employer has taken the works into beneficial use before final completion, the liquidates damages shall be adjusted to reflect that circumstance.
Yes to both questions.
Parties may agree an amount of liquidated damages which is payable on the occurrence of specified breaches. This most commonly is seen as a rate payable by the contractor for failure to achieve completion by the agreed date for completion.
Consistent with other common law jurisdictions, liquidated damages are unenforceable only if the amount specified is considered penal. To be enforceable, the amount must be a genuine pre-estimate of the employer’s loss in the event that the relevant breach occurs. It must not be extravagant or unconscionable compared to the range of losses that could reasonably have been anticipated when the parties entered into the agreement.
If a liquidated damages provision is unenforceable, an employer ordinarily will still be entitled to claim general law damages for breach, but it will need to prove its loss. There is some debate as to whether the specified liquidated damages amount could act as a cap to the general law damages payable in these circumstances, but the generally accepted view is that it does so operate as a cap (as confirmed in a recent Canadian case, which authority would be regarded as persuasive authority in Hong Kong).
An employer’s right to claim liquidated damages also may be curtailed for other circumstances. For example, if an employer has caused delay to completion by the agreed date for completion, and if there is no extension of time provision covering the delay, the “prevention principle” might operate to deny the employer its right to claim liquidated damages for such delay.
Contracts very commonly prescribe the rate of delay damages.
Such clauses tend to be upheld by the courts provided that they are clear, certain and they do not constitute a penalty (i.e. they do not impose a detriment which is out of all proportion to any legitimate interest of the innocent party in enforcing its obligations under the contract). In practice, it is very difficult to show that liquidated damages provisions negotiated between two well-advised commercial parties constitute a penalty.
Occasionally, liquidated damages may not be enforced as a result of uncertainty, for example where partial possession or sectional completion has taken place and the contract does not adequately apportion damages.
Liquidated damages provisions are commonly used in construction contracts in the United States. Liquidated damages represent an amount of money that the contracting parties agree is an appropriate estimate of the damages a party will sustain if the contract is breached. In construction contracts, liquidated damages most commonly apply when the contractor breaches the contract by not completing the work on time. A formula is generally employed to compute how much a contractor owes for failing to complete on time. For example, the prime contract might provide that the contractor must pay the owner $1,000 for each calendar day that the contractor misses the date for substantial completion. Conversely, contractors may encounter unforeseeable delays beyond their control (often called “excusable delay”). Rather than being assessed liquidated damages, a contractor is generally permitted a time extension, which will not trigger liquidated damages.
Liquidated damages clauses provide advantages to both parties by setting the amount of damages for breach - an owner knows how much it will be compensated, and a contractor knows how much exposure it has in the event of late completion. Liquidated damages also provide certainty for either party in situations when proving the amount of actual damages due to late completion proves difficult. Generally, if the owner stipulates to an amount of liquidated damages that are lower than what is later determined to be its actual damages, the owner has forgone the right to pursue a claim for actual damages.
Although commonly found in construction contracts, the enforceability of liquidated damages provisions is unpredictable. To be enforceable, the clause must contain various elements. The actual damages must be difficult to quantify, the amount must be agreed upon in advance (i.e. liquidated), the amount must be reasonable, the amount must serve as compensation and not act as a penalty, and the remedy must be exclusive. Most of the litigation involving the enforceability of liquidated damages provisions revolves around the “reasonableness” of the amounts sought using the formula employed in the contract, as well as whether the provision acts as a penalty imposed on the breaching party.
Contracts do contain provisions that provide for indemnity caused due to delays. Such provisions must be in line with the thereto applicable Law on Contracts and Tort, by which the following is prescribed: A creditor and a debtor may stipulate that the debtor shall pay to the creditor a specific sum or supply him with some other property benefit, should he fail to perform his obli¬gation, or delay in performing it (liquidated damages). Unless something else results from contract, liqui¬dated damages shall be considered as stipulated for the case of a debtor becoming late in performance. However, liquidated damages shall not be stipulated in rela¬tion to monetary obligations. Contracting parties may determine the amount of liq¬uidated damages as they please, either in form of a lump sum or as a percentage, or for each day of delay, or in some other way. Such liquidated damages have to be stipulated in the form prescribed for the contract from which the obligation envisaged by it arises. When liquidated damages have been stipulated for the breach of obligation, the creditor may request either the performance of obligation or the payment of such liquidated damages. The creditor shall be entitled to request the liquidated damages even should their amount exceed that of the loss sustained by him, as well as if he does not sustain any loss at all. Should the loss sustained by the creditor be higher than the amount of liquidated damages, he shall be entitled to demand the difference to cover the entire loss.
Most contracts contain delay liquidated damages clauses. These usually apply from the date for completion defined by the contract and are payable on a daily basis until completion is achieved.
It is relatively common to see a cap on the amount of delay damages which can be applied – typically 10% of the contract price.
The entitlement to set the sum is prescribed by Article 390(1) of the Civil Code which permits parties to fix an amount of compensation in advance.
However, Article 390(2) expressly notes that the court is entitled to vary such agreement to make the compensation equal to the loss, and thereby void the prior agreement on the fixed compensation. The means that either party may apply to the court to vary the amount set in the contract, if compensation is payable. The amount may be revised up or down.
Delay liquidation damages provisions are quite common in German construction contracts. Under a standard delay liquidated damages provision, the client can recover a specified sum as soon as the work completion date has been missed, without having to prove actual losses. In most cases the client will be able to deduct or offset the liquidated damages against sums owed to the contractor. Delay liquidation damages provisions are usually upheld by the courts. However, if delay liquidation damages provisions are part of general terms and conditions (Allgemeine Geschäftsbedingungen – AGB) they may be declared void if the grossly and unfairly disadvantage the contracting party. Hence, delay liquidation damages provisions that are incorporated into general terms and conditions may not award damages exceeding 5% of the contract value to the customer.
Contracts do usually provide for lump-sum contractual penalties in the event of default. However, such contractual penalties are subject to a judicial right of abatement. However, the court may not abate the contractual penalty to an amount which is below the actual losses suffered.
It is very common for a construction contract to contain penalties in case of late performance of the works.
The Courts upheld these penalties, but they can revise their amount if they deem it patently excessive or derisory.
The concept of delay liquidated damages is recognised under Greek Law under two separate forms, namely the penalty clause and the security down payment. Particularly, pursuant to Art. 404-407 of the GCC, the parties may agree that in case of a breach of contract, the liable party must pay to the other party a particular amount ('penalty clause'), which shall be reasonable and not excessive (409 GCC), otherwise risking annulment by the Greek courts. As per Art. 402-403 of the GCC, the parties may agree that the down payment provided by a party upon conclusion of a contract as a security for the good performance of the contract, shall be forfeited in case such paying party finds itself in default ('security down payment').
In the field of public works contracts, Art. 148 of Public Procurement Law provides for specific penalty clauses in case of delays in the project schedule attributable to the contractor.
All government contracts contain penalty clauses of up to 10% of the contract value in construction contracts, and private sector contracts tend to contain similar provisions. Penalty clauses and liquidated damages agreements in private sector contracts are upheld by the courts if they are not excessive or are disguised interest provisions.
Most standard forms of contract used in Malaysia contain provisions for Liquidated and Ascertained Damages, better known as “LAD”. For example, Clause 40 of PWD Form 203A (Rev. 2007), Clause 22 of PAM Contract 2006, and Sub-Clause 8.7 of Conditions of Contract FIDIC Yellow Book.
LAD clauses will not be automatically upheld by the Courts – by virtue of Section 75 of the Contracts Act, where a specific sum is named in the contract in cases of a breach, such sum constitutes as a penalty. (Selva Kumar a/l Murugiah v Thiagaraja a/l Retnasamy )
Accordingly, parties seeking to rely on the LAD provision will have to prove the actual loss suffered as a result of the breach. In cases where it is difficult or impossible to accurately quantify the actual losses, the injured party may only be entitled to a “reasonable compensation” capped at the value stipulated in the LAD provision.