The Problem
We signed a construction contract for three detached bungalows. The client drafted the contract in-house. It was basic and did not conform to standard specifications.
However, it did include a clause defining a penalty for delayed building work. Unfortunately, we completed nine weeks late, and now the client seeks £27,000 in damages. Can we combat this claim?
Shaun
Response:
Your problem concerns specifically liquidated damages for not fulfilling your obligations under the contract.
What are Liquidated Damages?
Liquidated damages are pre-determined fixed sums or periodic rates that apply if one party breaches the contract. In your case, the rate applies if you fail to complete the project on time.
Liquidated Damages in Your Case
I assume the liquidated damages clause in the contract was valid, and a single date for completion was present in your agreement. What’s more, I assume the damage rate for the delay was £3,000 per week (£27,000 ÷ 9 weeks = £3,000).
Since we last answered a question regarding liquidated damages in 2013, a landmark case has shifted the law.
Before 2015, Dunlop Pneumatic Tyre Company Ltd. v New Garage and Motor Company Ltd 1915 established that an employer must demonstrate that their liquidated damages rate was a genuine estimate of probable losses when conceived. If they could not, the damages were unenforceable, although the employer could prove its losses.
Considerations When Enforcing a Liquidated Damages Penalty
In 2015, the Supreme Court ruled in an £85 private parking infringement notice dispute. The case presented a new test determining whether a clause is a penalty and unenforceable; the charge cannot be ‘extravagant nor unconscionable’.
Before 2015, to defend a penalty sum, the innocent party must show that it was a pre-estimated likely loss when established. Now, if the sum is a legitimate interest of the innocent party, it must not be extravagant or unconscionable compared to their interests.
What Types of Damages Can the Client Claim?
The innocent party can seek compensation for damages. A court can grant three types of damages:
- Economic damages
- Non-monetary damages (e.g. emotional or bodily harm)
- Punitive damages (imposing additional punishment on the guilty party)
In your case, the client is seeking economic damages, and others are unlikely to apply. Whilst £3,000 a week for three bungalows seems high, a court will probably not find them extravagant or unconscionable.
Extension of Time
If the delay was due to an event that was not your fault, and you can reasonably prove that you were not at fault, you may only have to complete the work in ‘reasonable time’, and the completion date is waived. The client cannot enforce damages.
Partial Possession and Sectional Completion
If your client took possession of part of the site during the project, you may not be liable for all of the liquidated damages. This principle is considered a sectional completion when specified in the original contract. However, based on your account, I suspect it was not included, making it partial possession.
Partial possession certifies that part of the project achieved practical completion. The client should discount them from the requested damages.
Instruct our Team
If you need support with your construction dispute, contact our solicitors by emailing us at info@witansolicitors.co.uk or completing our contact form. We are happy to help and explain the most practical options.
Featured image: Pexels Licence - Quang Nguyen Vinh
