Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?


Norway Small Flag Norway

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.

Sweden Small Flag Sweden

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.

Hong Kong Small Flag Hong Kong

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.

United Kingdom Small Flag United Kingdom

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.

United States Small Flag United States

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.

Serbia Small Flag Serbia

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.

Updated: April 24, 2018