Performance criteria liquidating damages

09-Oct-2019 12:01

Liquidated damages are damages defined in the construction contract and chargeable against funds due to the contractor for each day the contractor fails to complete the project beyond the contract completion date.Hence, a liquidated damage provision provides a straight forward method of calculating damages recoverable by an owner in the event of late completion.One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance.However, most courts will seek to achieve a fair result and will not enforce a term that will lead to the unjust enrichment of the enforcing party.(3) However, the inclusion of a liquidated damages clause may not be equitable to both parties in terms of the balance between the legitimate interests of one party and the result outlook of the other.They are essentially a fixed sum that accrues to a party as a means of compensation following a breach of a contract.Most commonly they occur as a result of breach to deliver a good or service on time (i.e., late performance) however, liquidated damages can also be used for other breaches.For many projects, owners shift at least part of the risk of late completion onto contractors.

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In today's competitive marketplace, few owners or contractors can afford the cost of late projects.Liquidated damages are often calculated on a daily or weekly basis, and as a percentage of the contract price, and should be a genuine pre-estimate of the client's loss arising from the delayed completion.In most legal systems, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach, rather than to compensate the injured party(1) (in which case it is referred to as a penal or penalty clause(2)).One of the principle requirements of a liquidated damages clause is that it does not venture into the realm of a penalty – which would make that clause void and unenforceable. When dealing with contracts that contain liquidated damages clauses, it is important you consider the following: Are the damages a genuine, pre-agreed estimate (liquidated damages)? In Ringrow [2], the High Court reiterated the law separating penalties from liquidated damages.

Facts BP sought to exercise an option to buy back a BP service station independently owned by Ringrow – following a discovery that Ringrow breached the contract by selling non-BP fuel.

Contractors tend to use liquidated damages clauses as 'previously set' remedies, providing for compensation to the injured party upon default attributable to the other party.