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Liquidated v unliquidated damages

Revision as of 17:23, 23 November 2017

Contracts generally include a provision for the contractor to pay liquidated damages (or liquidated and ascertained damages, sometimes referred to as LAD's) to the client in the event that the contract is breached.

Liquidated damages are a pre-agreed amount of money that is contained in a clause provision to a contract, that fixes the sum payable as damages if one of the parties breaches the contract. It is usually agreed in the contract what will constitute a breach that requires a payment of liquidated damages.

In building contracts, liquidated damages usually relate to the contractor failing to achieve practical completion (i.e. completing the works so they can handover the site to the client) by the completion date set out in the contract.

Unliquidated damages are damages that are payable for a breach, the exact amount of which has not been pre-agreed. The sum to be paid as compensation – which is said to be ‘at large’ - is determined after a breach occurs by a court (either a judge or jury). In standard form construction contracts, parties will sometimes insert ‘NIL’ or ‘n/a’ for the rate for liquidated damages. The proper construction of the contract as a whole will determine the effect of ‘NIL’.

One of the key advantages of a liquidated damages clause is that there is no need to prove the actual loss since the clause provides a pre-estimation of the damages to be paid. In addition to helping recover damages, this helps to provide certainty to the parties, simplifies the dispute resolution procedure, and may induce performance of the contract.

The advantage of unliquidated damages is that it allows for recovery of losses even though the damages were impossible to estimate with any certainty before the breach. This can also extend to damages that depend on a certain event occurring or not occurring.

If parties wish to exclude liability for unliquidated damages, they must state it clearly in the contract to avoid ambiguity. Liquidated damages provided for under the contract should be stated as being the sole remedy available for breaches of the contract.

In the case of ‘Temloc Ltd. v Errill Properties Ltd.’ [1987], the court decided that 20 unliquidated damages claims that had been excluded by the use of ‘£ Nil’ could not be awarded since the parties had agreed that damages for late completion were to be specifically liquidated, rather than unliquidated, damages.