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21 Mar 2017

Liquidated damages

I am building a development comprising eight houses.

Six of the houses have been completed on time and handed over but the contractor is late in delivering the last two. My contractor is appointed under a JCT Standard form of the building contract. The contract does not provide for sectional completion but it does provide for liquidated damages (LADs) of £1,000 per week per house. I now want to claim the LADs due from the contractor but the contractor is claiming that the LADs are unenforceable. Could the contractor’s challenge succeed?

The first thing to remember is that, as an employer, your entitlement to LADs will not crystallise until any preconditions required by the building contract have been satisfied. Preconditions are usually a number of procedural steps that the employer must carry out before deducting LADs, such as those under the JCT Standard Building Contract which require that the employer has:

  • issued a certificate of non-completion;
  • notified the contractor before the date of the ‘final certificate’ that he may require payment of (or may withhold or deduct) LADs; and
  • given notice to the contractor not later than five days before the final date for payment of the ‘final payment’ of the intention to claim or deduct the LADs.

Another key requirement for LADs to be enforceable is that they are a “genuine pre-estimate of loss”. In other words, the level of LADs must not be unconscionably or extravagantly disproportionate to the level of loss or damages likely to be suffered. If LADs are found to be in this order then they may constitute a penalty and as such will be unenforceable.

The argument that the contractor may be seeking to raise in your case is based on the judgment in Bramall and Ogden v Sheffield City Council. The facts, in this case, were similar to those in your scenario set out above. The issue is how the LADs are expressed in the contract and whether that is consistent with the contractual provisions for sectional completion and partial possession.

In your case, the contract does not provide for sectional completion, so when you took over the completed houses you did so under the JCT provisions for ‘partial possession’. The partial possession provisions entitle the contractor to a pro-rata reduction in the level of LADs applicable to the rest of the works (i.e. the remaining 2 houses) to the extent that they are completed late.

However, if the LADs rate has been expressed in the contract as a rate ‘per house’ and not as a rate for the whole of the works, the rate cannot be proportionately reduced in accordance with the contractual mechanism – it does not make sense to reduce £1,000 per house per week by reference to the proportionate value of the remaining houses. In order to do that, you would need the rate to be given as £8,000 per week (for the whole of the works i.e. all eight houses) and a court will not find an implied rate for the whole works by multiplying up by the number of houses. Consequently, in your case the LADs are likely to be unenforceable.

This could have been avoided by ensuring that the LADs rate was expressed as a total for the whole of the works (i.e. £8,000 per week), or, alternatively, by utilising the JCT sectional completion provisions such that each house was a ‘section’ with its own sectional completion date and sectional LADs, which effectively achieves an LADs rate “per house”.

This article originally appeared in Professional Housebuilder & Property Developer.