Do contracts commonly contain liquidated delay damages provisions and are these upheld by the courts?
Construction (2nd edition)
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.
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).
It’s common practice that the parties may stipulate liquidated delay damages payable upon contractor’s delay for certain agreed milestones. As long as the contact is valid and such liquidated damages are commensurate to the loss incurred, the judicial practice tends to uphold such provisions. Where a party demands a reasonable decrease of an obviously high liquidated damages (i.e. the agreed liquidated damages exceeds 30% of the incurred loss according to judicial interpretation of the Supreme Court), the court will review under the principles of fairness and good faith by comprehensively considering the factors of the actual loss, the contract performance, the party’s degree of fault and the anticipated profit.
Contracts commonly contain a provision which does not represent liquidated delay damages but liquidated delay penalty. The penalty is payable in a percentage defined per day up to the defined maximum amount. The maximum amount cannot be unreasonably high and is defined in practice and by the courts to be between 5 and 10% of the aggregate contract price. The penalty is applicable to the delay but can also be applicable to non-performance. In the case of a penalty clause for non-performance, if the employer requires the payment of penalties, he is not authorised to also require the performance of the contractual obligations.
Liquidated penalties differ from liquidated delay damages because penalties are always payable in the event of a delay attributable to the contractor (or non-performance) notwithstanding the damage suffered by the employer. Liquidated damages are payable even if there is no damage suffered, but if the damage is higher than the amount of liquidated damages paid, the employer is entitled to demand the payment up to the full compensation.
The payment of such liquidated penalties is prescribed by the Croatian Civil Obligations Act and upheld by the courts.
Delay liquidated 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 liquidated 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.
The concept of liquidated delay 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.
Contracts may contain liquidated delay damages provisions. Such are upheld by the courts to the extent they are reasonable.
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 represents an 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 ether 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 very 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 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.
Conventional damages are a special category found in construction contracts, which are also known as liquidated damages. They are a predetermined amount of money that becomes chargeable without court proceedings if specific violations occur, such as delay in completing work beyond the agreed time.
Construction contracts, especially in the public sector, very commonly prescribe the rate of delay damages, which actually replace the normal right of a party to claim general damages, which are claimed in court, and which are calculated from the amount the damage actually suffered by the innocent party.
However, it is important to be able to separate contractual damages from penalties, which are not enforceable by the courts. For example, if a predetermined contractual compensation proves that it is not the result of an accurate and / or reasonable calculation of potential damage and is, on the contrary, excessive, then the Court may consider that provision as a sanction.
Liquidated delay damages are very common provisions in Brazilian contractual practices, including in construction contracts. Such conditions are usually upheld by our courts to the extent that is not considered abusive, which may happen for example if the actual amount the LD is clearly excessive in relation to the contract value.
Parties are permitted to agree in advance a fixed sum (liquidated damages), which will be paid by the Contractor to the Employer in the event of particular breaches, e.g. liquidated damages for late completion, usually expressed as a fixed amount for every day or week of delay beyond the date for Practical Completion. The sum to be paid must be a genuine pre-estimate of loss, but if it is not, the Contractor can seek to set it aside as a penalty. If the purpose is not intended to be compensatory but rather to force performance with the contract, that will be a factor pointing to it being a penalty.
It is common that Owner imposes liquidated damages to contractors for delays 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 in each month there is a comparison between expected works and performed works. The Owner is allowed 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.
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.
Building construction contracts usually include stipulations which impose compensation for delay in execution and are usually confirmed by the Courts of Justice.
Contracts for the execution of public infrastructures also include stipulations, which impose an indemnity to be paid by the contractor in case of breach of deadlines and are usually confirmed by the Courts of Justice. Specifically, they are contemplated in Article 194 of the Law on Public Sector Contracts.
As opposed to Anglo-Saxon jurisdictions, Turkish Law defines penalties rather than liquidated damages. Contacts commonly contain delay penalty clauses. As a principle, commercial companies and real person merchants cannot claim that the amount contemplated as penalty is not reasonable. However, in exceptional circumstances, if the amount of a penalty is so high that it would financially destroy the party who is obliged to make payment of it, the courts may intervene and decrease the amount of liquidated damages. (Court of Cassation 23rd Civil Chamber D., E:2015/9886 K:2018/3074). On the other hand, “liquidated damage” concept is also used for cross-boarder transactions where parties involved are associated with an Anglo-Saxon jurisdiction.
Yes. Construction contracts commonly provide for delay liquidated damages and prescribe a rate for such damages. These clauses tend to be upheld by the courts, adjudicators and arbitrators, as applicable, provided that they are not contrary to public policy.
Delay liquidated damages constitute a penalty under South African law i.e. there is no distinction between delay liquidated damages and penalties. Accordingly, delay liquidated damages are governed by the Conventional Penalties Act, 15 of 1962 (“the Conventional Penalties Act”). The purpose of the Conventional Penalties Act is, as a matter of policy, to give legitimacy to penalties as a function of the parties’ freedom of contract. South African law therefore takes the view that penalties are prima-facie enforceable.
Under the Conventional Penalties Act, a party may apply to court to have an “excessive penalty” reduced if the amount of the penalty is out of proportion to the prejudice suffered by the creditor. The court may, in its discretion, reduce the penalty as it considers fair. The onus lies on the claimant to establish that the penalty is disproportionate to the loss suffered by the Employer, which from an evidentiary perspective can be very onerous for a contractor.
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.
Most construction contracts contain liquidated delay damages provisions. These provisions are in general upheld by Swedish courts in accordance with their terms. However, they are often adjusted if a part of the subject of the construction works has been completed or in use.
Most construction contracts in Denmark include delay liquidated damages provisions. The AB Standards state that no additional claims arising out of the delay can be made in excess of any 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 (within a reasonable time after the employer became aware of it) and that liquidated damages will be claimed from a specific point of time as a result thereof. The employer must also on an ongoing basis register and notify the contractor of the duration of the delay. Under some circumstances, stricter conditions for claiming liquidated damages apply.
- Yes, parties usually incorporate liquidated delay damages provisions in their contracts. Usually, provisions providing for such liquidated damages fix the rate of damages that would accrue for each day that the completion of the project or a milestone is delayed.
- Although the courts generally accept the validity of such provisions, the courts can reduce the amount of liquidated damages agreed by the parties. Under Article 398(2) of the Civil Act, where the court finds that the amount of liquidated damages agreed by the parties is “unduly excessive”, it may reduce the amount to a more reasonable and appropriate sum. In practice, the Korean courts often do exercise this authority to reduce the amount of liquidated damages. There is no specific test for determining when agreed liquidated damages may be considered “unreasonably excessive”. The court has the discretion to determine when liquidated damages are unduly excessive and will consider the overall fairness of the contractually stipulated amount of liquidated damages having regard to factors such as (a) the status of the parties; (b) the purpose and contents of the contract, (c) the reason for pre-determining liquidated damages, (d) the ratio of the pre-determined liquidated damages to the contract price, and (e) the amount of estimated damages.
- It is worth noting that since Korea is a civil law jurisdiction, delay in completion does not, in principle, result in strict liability for failing to meet the required completion date. It is only when the delay in completion has been caused by the fault of the contractor that liability for delay damages will arise. In practice, however, the burden of proving that the contractor was not at fault lies on the contractor and is not readily shifted. As a result, employers do not have to prove fault when raising claims. While parties may in principle agree to impose strict liability obligations in a contract (i.e., obligations whose breach does not have to arise out of fault in order to result in liability) the Korean courts will only read such an intention in the parties’ contract when it is stated in clear and unequivocal terms, and in such cases are likely to interpret the relevant provisions strictly.
- In addition, Korean law also recognizes party agreement as to penalties for failing to meet contractual obligations. These are generally distinguished from agreed liquidated damages on the basis that they are intended to secure performance of the contract, as opposed to providing a pre-agreed estimate of compensation due in case of a breach of contract.
- Penalty provisions may be reduced or invalidated as contrary to public policy by the courts if the amount of the penalty is considered to be excessively burdensome as compared to the claimant’s interest in compelling performance.
- Where a penalty provision is upheld, payment of the penalty will be in addition to any compensation for damages, liquidated or otherwise.
- Where it is unclear whether certain pre-agreed sums are intended to operate as a penalty or as liquidated damages, the courts will presume that the parties intended the sums to operate as liquidated damages.