Liquidated Damages

Assuming a construction contract is in place, it is not uncommon to find a provision that provides for payment of a fixed amount, likely called "liquidated damages", should the contractor fail to complete by an appointed date or within a period specified for completion.

The issue that arises when considering to include such a provision in the construction contract is whether the amount specified is a true assessment or "genuine pre-estimate" of damages suffered by and, therefore, payable to the owner by the contractor as a result of contractor's failure to complete, or whether the amount is in fact a penalty.

In many cases it is difficult to determine at the pre-contracting stage what the owner's potential losses or damages may be and are triggered by the contractor's failure to complete. What is clear is that only those provisions that reflect a "genuine pre-estimate" of damages to be suffered by the owner on breach by the contractor are enforceable.