As a contractor, it is vital that any time you enter into a contract, you hold realistic expectations of the work they require from you. You must ensure you always agree to a realistic program of works to be certain that you can complete your work by the set fate for practical completion. If not, you’ll have breached contract and be liable for any and all damages arising from your delay.
Protecting yourself in case things should run over schedule is therefore of great importance.
In the event of practical completion not being met, you can help restrict the amount of damages you would be liable for, by insisting that your contract contain a clause for liquidated damages that limits the amount payable should a delay occur. This should include both a limit per day and an overall cap on the maximum amount of liquidated damages that you would be liable for.
These clauses ensure that you are protected from the perils such as fire, flood or pestilence which may cause significant delays, even though you might have nothing to do with them.
Liquidated damages clauses also benefit the principals on a project, as they provide a significant incentive for all contractors to achieve early completion.
The courts have determined that liquidated damages must not be seen as a ‘penalty’, but rather they should be a genuine estimate of the losses that could occur due to a delay being caused by a contractor.
These estimations should be determined when the contract is initially signed, allowing the contractor to negotiate a rate that fairly suits both parties.
An example of this in action would be the State of Tasmania v Leighton Contractors Pty Ltd (2005), a contract involving highway design, construction and maintenance. The contract had a liquidated damages clause allowing $8,000 per day to be withheld from Leighton in the event of a delay on completion. Completion was delayed and a significant volume of damages accrued. On appeal the Court determined the figure of $8,000 not to be a penalty but a reasonable response to the complexity, importance and value of the contracted works even though the total amount came to a hefty $1,832,000 in damages for Leighton.
Contractors are therefore well advised to negotiate liquidated damages clauses into all of their contracts, which reflect a fair apportionment of the risk of delay and to have a limit on the extent to which liquidated damages can eat into their profits.