Construction law specialist, Jan Rzedzian, provides guidance on Liquidated Damages in construction contracts, highlighting the core principles from the case of Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited.

Liquidation damages clauses in Contracts continue to be a major source of disputes between parties to commercial Contracts. Within the Construction and Engineering sectors, in particular, the inclusion of liquidated damages as an Employer’s financial remedy for a Contractor’s delay in completing the works is well established and commonly included in both standard and bespoke forms of Contract.

Under English Law, the liquidated damages clause generally allows the contracting parties to pre-set the level of damages recoverable by the innocent party in the event of a specified breach by the party in default. The benefit of such a clause is that it is quicker and more commercially expedient for the innocent party to claim the agreed liquidated sum once the event occurs, rather than issue a claim for damages for the particular breach.

In addition, the innocent party simply needs to show that the relevant breach has occurred. They do not have to prove they have suffered any actual financial loss as a result of the breach, nor that they’re under a duty to mitigate loss, as would be the position where a claim for general damages is made. As a consequence, the amount recoverable will not be subject to the Court’s general discretion.

Historical Approach to Liquidated Damages

The key authority on liquidated damages remains the case of Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited (1915) AC79 which was decided over 100 years ago. The basis of the case is that a liquidated damages figure will be struck out as unenforceable if it is considered to be a penalty. Subsequent cases have elaborated and clarified the core principles laid down in the “Dunlop” case, which can briefly be summarised as follows:

• The purpose of the liquidated damages clause is crucial. Its primary purpose must be to compensate the innocent party for any loss suffered as a result of the breach of Contract. If the intention of the clause is to apply undue force on a party to compel him to perform the Contract, it will be regarded as a penalty and consequently unenforceable.