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Delay damages
Latest Update
21 January 2014

Author(s)
Martin Wood - Sloan Plumb Wood LLP

The concept of liquidated damages has a long and successful history in English contract law. The
general principles can be traced back well beyond the well-known modern authority outlining those
principles which is now almost 100 years old, Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor
Co Ltd [1915] A.C. 79. An agreement by the parties made at the outset of the contract about the
losses payable in the event of a breach of contract can have significant commercial advantages for all
the parties. These include certainty, risk management and ease of practical application. There
remains, however, a tension between the courts' reluctance to allow a party to recover a penalty
payment in the event of breach of contract and the courts' general wish to hold a party to the
commercial bargain which it has freely negotiated. The history of cases since Dunlop illustrates this
tension and the courts' difficulty in setting out clear and authoritative principles as to which provisions
are penalties and which are not. The difficulty at a practical level has recently been illustrated in
Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 which involved the sale of a large
advertising and marketing business in the Middle East to part of the WPP Group. The agreement
contained provisions (explained further below) which provided for payments to be re-calculated if the
seller breached various restrictive covenants. The practical effect of a breach could cost the seller
many tens of millions of pounds, but at first instance in the Commercial Court the recalculation
provisions were upheld. However, in November 2013, the Court of Appeal came to the opposite view
about the recalculation provisions and refused to enforce the provisions as they amounted to
unenforceable penalties.

The inherent difficulty in drafting such provisions and advising with certainty about the effect of such
provisions is easy to understand given such differing views about the same provisions from
experienced commercial judges. Those difficulties aside, liquidated damages can be, and are,
regularly used across a wide range of contracts such as process plant, building, engineering and
even employment contracts. There is a wide range of breaches of contract for which a liquidated
damages clause can be useful, including the most common example of liquidated damages for delay
as well as other breaches of contract such as non-performance or part achievement of performance
specifications. This article considers the key issues relating to the use of liquidated damages to deal
with delay in construction and engineering contracts, although the same general principles apply, with
a few exceptions, to liquidated damages used in other contracts.

Overview of Topic
1.

The management of risk on a construction project involves a wide range of risk

management considerations. One of the key issues is consideration of which events may
impact on the planned programme of work and which party will carry the commercial risk
associated with such events. The use of liquidated damages for delay is one of the key
management tools available to manage, mitigate and plan for the risk of delay. There are
various key stages where liquidated damages should be carefully considered, such as at
the pre-tender stage, contract negotiation, during the course of the construction of the
project and post project completion. This article considers the following key issues:
Assessment of delay damages; the application of delay damages during the project; and

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challenging delay damages. Before considering those issues it is important to understand

the background to the concept of liquidated damages and its application in practice.
2.

3.

4.

5.

The key advantages of liquidated damages provisions are that they provide certainty for the
parties and are generally easy to apply. They also save substantial time and costs in having
to prove what actual losses were incurred. In addition there is no obligation on the employer
to have to take possibly expensive or non-commercial steps to mitigate losses or give credit
for benefits accruing from the steps to mitigate the loss. For a contractor, delay damages
have the benefit of providing a usually effective limitation of liability so that the costs of
delay can be assessed without having to take into account what actual loss the employer
might suffer. The liquidated damages concept also has the advantage of relative simplicity
in assessing commercial risk and deciding what resources to apply to accelerate progress
and enables a comparison between that cost and the delay damages payable to the
employer.
Background: A key starting point is to distinguish at the outset between liquidated
damages provisions and other types of contract provisions that may sometimes resemble
liquidated damages but to which the principles about whether the provision is an
unenforceable penalty do not apply. If parties agree to liquidated sums to be paid that do
not flow from a breach of contract then the liquidated sums payable will not be subject to
challenge as a penalty. The application of the principles that apply to penalties only apply to
liquidated sums payable following a breach of contract. This was illustrated in the
successful claim by Mr Henning Berg, the former manager of Blackburn Rovers, for an
agreed liquidated sum of over 2m for termination of his contract which was terminated in
accordance with a contractual right by Blackburn and not in breach of contract - Berg v
Blackburn Rovers Football Club & Athletic Plc [2013] EWHC 1070 (Ch); [2013] I.R.L.R. 537.
Other illustrations of this principle are Jervis v Harris [1996] Ch. 195, where sums due to a
landlord under a lease for repairing obligations were not a penalty, and Alder v Moore
[1961] 2 Q.B. 57 where a sum paid under an insurance policy to a professional footballer
who could no longer play due to an eye injury had to be repaid when the footballer started
playing four months after receiving the money. Although the declaration signed by the
player stated that the player would not play again and if he did "I will be subject to a penalty
of the amount stated above", this provision was enforceable as the obligation was not a fine
or penal but to reimburse the underwriters.
The practical effect of a liquidated damages clause will usually be to provide the party in
breach of contract with an effective limitation on its liability for loss arising from the breach
of contract. A question sometimes arises about the application of the principles applicable to
exclusion clauses to liquidated damages provisions, in particular, whether a liquidated
damages clause can be challenged as a limitation or exclusion clause, for example, under
the Unfair Contract Terms Act 1977. However, provided that the liquidated damages
provision is a genuine pre-estimate of the loss, it will not usually be classified as an
exemption clause - Suisse Atlantique Societe d'Armement SA v NV Rotterdamsche Kolen
Centrale [1967] 1 A.C. 361. It is also important for the employer when completing the
liquidated damages provisions to appreciate that those provisions will be construed strictly
contra proferentem so any ambiguity will be construed against the employer - see Peak
Construction (Liverpool) Ltd v McKinney Foundations Ltd 1 B.L.R. 111. The employer will
also usually not be able to rely on provisions in the Contract Bills referring to the works
being handed over in sections as a basis for the deduction of liquidated damages in relation
to delayed completion of sections unless the contract has been amended to provide for
sections - see Keating on Construction Contracts 9th Ed. para.20-139. Therefore
considerable care should be exercised in circumstances where the employer wishes to
calculate liquidated damages by reference to phases or sections of a project.
Introduction: All sophisticated construction contracts will include provisions to allocate the
risk of different delay events to the respective parties. The current JCT 2011 Design and
Build Form of Contract for example, identifies 14 Relevant Events (risk events) which can
entitle the contractor to an extension of time. On most commercial projects that list is

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reduced, sometimes quite significantly. The employer will, however, always wish to
maintain, at least, the right to grant extensions of time for any default on the part of the
employer (often called acts of prevention). If that right to grant an extension of time for
defaults for which the employer is responsible is not retained (or applicable) an act of
prevention by the employer (or those persons for whom the employer is responsible) could
result in the completion date being replaced by an obligation to complete within a
reasonable time. Also, the delay damages provisions will no longer apply and the right to
recover liquidated damages could be lost (see Keating on Construction Contracts, 9th Ed.
10-014-10-017). Liquidated damages therefore have to be seen in a commercial context.
Usually there is a range of events which may entitle a contractor to an extension of time and
in that event the issue of delay damages will often not arise even though the project is
completed after the original date for completion.
6.

7.

8.

Stage 1 - Assessment of Delay Damages: One of the key issues at pre-tender stage and
during the negotiations between the parties is the assessment of damages for delay. Even
on the most straightforward project, delays for which the contractor is responsible will
almost inevitably cause some financial loss to the employer. Usually on commercial projects
those losses can be considerable (lost rent, additional funding costs, loss of production or
loss of contracts are some examples). The JCT Contract Particulars refer usually to an
amount per week or pro rata thereof and the employer has an often difficult balancing act
when deciding what sum to include for liquidated damages. As explained later in this article,
the amount has to be capable of being demonstrated as a genuine pre-estimate of the loss
at the time the contract is made - Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co
Ltd [1915] A.C. 79. However, often that genuine pre-estimate has to then be balanced
against the willingness of a prospective contractor to accept that commercial risk. The
weekly losses for delay may be substantial and disproportionate to the contractor's overall
expected commercial return on the project (for example, in the process or power industries
where production losses can be considerable). It is common therefore for the agreed
amount of delay damages to be a result of a commercial negotiation down from the
employer's actual genuine pre-estimate of its weekly loss to achieve balance with the
amount of loss per week the contractor is on a commercial basis prepared to accept.
The amount of the liquidated damages may also be subject to an overall contractual
limitation related to a maximum percentage of the contract sum (often 10%) for which the
contractor can be liable. In such circumstances the employer can often be left with a
contractor with no effective commercial incentive to provide additional resources to
accelerate progress so as to complete a delayed project as the liquidated damages cap has
been reached. The situation is sometimes more complex in other forms of contracts; for
example, those including pain/gain provisions related to the time for completion where there
is often more of a commercial incentive (in terms of gain for the contractor) to accept a
robust and potentially more painful level of liquidated damages. The key issue from an
employer's perspective is to negotiate a realistic figure bearing in mind that liquidated
damages will also almost always act as a limitation of the contractor's liability for delay and
so too low a figure will leave the employer with substantial irrecoverable losses in the event
of delay.
Stage 2 - Application of Delay Damages During the Project: The application of delay
damages during the course of the project usually arises once the original date for
completion of the works has passed without the contractor having been granted an
extension of time. This gives rise to both practical and legal issues which the employer
needs to consider before deciding whether or not to deduct liquidated damages from
monies falling due to the contractor. From a practical perspective, the imposition of
liquidated damages will have a fairly immediate impact on the contractor's cash flow (to
some degree depending on the extent to which the contractor can pass those damages
down to sub-contractors) and also can have an unpredictable impact on working
relationships across the project team. On a traditional form of construction contract, where
the architect or engineer determines the contractor's entitlement to extensions of time,
deduction of substantial delay damages by the employer can create friction within the
project team and will often lead the contractor to institute a formal dispute resolution

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process in respect of its extension of time claims, such as adjudication.

9.

10.

11.

12.

The employer will also be mindful of the contractor's financial stability and can be put in a
difficult position if there are significant doubts concerning the contractor's finances. In such
circumstances there is a greater incentive for the employer to deduct delay damages (as
the contractor may not be in business to pay the delay damages after the project is
completed) but the consequences of so doing could push the contractor into insolvency or
slow progress on the project as key sub-contractors and suppliers are not paid. The
employer also needs to exercise care to ensure that proper notices are given if liquidated
damages are to be deducted. Under clause 2.29 of the JCT DB 2011 Design and Build
Contract the employer has to give notice as a pre-condition to seek recovery of delay
damages. The employer may also need to give a notice of intention to pay less under the
contract or under the Housing Grants, Construction and Regeneration Act 1996 (as
amended by the Local Democracy, Economic Development and Construction Act 2009) and
the Scheme for Construction Contracts (England and Wales) Regulations 1998/649 (as
amended by the Scheme for Construction Contracts (England and Wales) Regulations 1998
(Amendment) (England) Regulations 2011/2333) and failure to serve such notice will also
prevent recovery of delay damages.
Stage 3 - Challenging Delay Damages: There are sometimes incentives for either party to
argue that the delay damages are not recoverable. From the contractor's perspective this
may be because they face a substantial claim for many months of delay and considers the
employer would have real difficulty in demonstrating any actual loss. From the employer's
perspective they may wish to challenge the delay damages clause in order to seek to
recover general damages if the liquidated damages clause can be shown to be
unenforceable and its actual losses are possibly greater.
The main way in which the parties may seek to challenge liquidated damages would firstly
be to establish the clause is unenforceable as a penalty - the Courts will usually not enforce
a disproportionate or excessive liquidated damages provision. However, as long as the
amount of damages is a genuine pre-estimate of possible loss at the time the contract is
made, the approach of the Courts has been very much to enforce the bargain the parties
negotiated. In one of the leading authorities, Philips Hong Kong Ltd v Attorney General of
Hong Kong 61 B.L.R. 41 Lord Woolf explained that it was not sufficient for a party seeking
to demonstrate that a clause was a penalty just to provide examples where the application
of the liquidated damages provision could result in a larger sum being recovered by the
injured party than his actual loss. Even in those situations, as long as the sum payable in
the event of breach of contract is not extravagant, having regards to the range of losses that
could reasonably be anticipated the clause would have to cover at the time the contract was
made, the clause can still be a genuine pre-estimate of the loss and so an enforceable
liquidated damages provision. Lord Woolf noted that "the Court has to be careful not to
set too stringent a standard and bear in mind that what the parties have agreed should
normally be upheld. Any other approach will lead to undesirable uncertainty especially in
commercial contracts".
The issue of whether a liquidated damages clause is a genuine pre-estimate or an
extravagant or unreasonable sum was also considered more recently by Mr Justice Jackson
in Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC); [2005] B.L.R.
271 and having reviewed various authorities, Mr Justice Jackson summarised the position
as follows:"48. Let me now stand back from the authorities and make four general observations,
which are pertinent to the issues in the present case. 1. There seem to be two strands in
the authorities. In some cases judges consider whether there is an unconscionable or
extravagant disproportion between the damages stipulated in the contract and the true
amount of damages likely to be suffered. In other cases the courts consider whether the
level of damages stipulated was reasonable. Mr Darling submits, and I accept, that
these two strands can be reconciled. In my view, a pre-estimate of damages does not

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have to be right in order to be reasonable. There must be a substantial discrepancy

between the level of damages stipulated in the contract and the level of damages which
is likely to be suffered before it can be said that the agreed pre-estimate is
unreasonable. 2. Although many authorities use or echo the phrase "genuine
pre-estimate", the test does not turn upon the genuineness or honesty of the party or
parties who made the pre-estimate. The test is primarily an objective one, even though
the court has some regard to the thought processes of the parties at the time of
contracting. 3. Because the rule about penalties is an anomaly within the law of contract,
the courts are predisposed, where possible, to uphold contractual terms which fix the
level of damages for breach. This predisposition is even stronger in the case of
commercial contracts freely entered into between parties of comparable bargaining
power. 4. Looking at the bundle of authorities provided in this case, I note only four
cases where the relevant clause has been struck down as a penalty. These are
Commissioner of Public Works v Hills [1906] A.C. 368, Bridge v Campbell Discount Co
Ltd [1962] A.C. 600, Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993]
A.C. 573, and Ariston SRL v Charly Records Independent, April 13, 1990. In each of
these four cases there was, in fact, a very wide gulf between (a) the level of damages
likely to be suffered, and (b) the level of damages stipulated in the contract. "

13.

In the recent Court of Appeal judgment Makdessi v Cavendish Square Holdings BV [2013]
EWCA Civ 1539, the approach of Lord Justice Christopher Clarke was firstly to consider
whether or not the clauses in dispute were extravagant and unreasonable, which he
decided they were in the circumstances of that case. However, that was not determinative
as to whether the clauses were penal, although if the clauses were genuine pre-estimates,
as he said "they can scarcely be penal". Lord Justice Christopher Clarke's view was that the
clauses in issue "go way beyond compensation and into the territory of deterrence" and that
was the predominant function of the particular terms. He said that:
" I am satisfied that the clauses, taken in the context of the Agreement as a whole, are
not genuine pre-estimates of loss. On the contrary they are extravagant and
unreasonable. That is not necessarily conclusive. A commercial justification may mean
that a clause which is not a genuine pre-estimate is not penal."
He also explained that:
"The underlying rational of the doctrine of penalties is that the Court will grant relief
against the enforcement of provisions for payment (or the loss of rights or the
compulsory transfer of property at nil or an undervalue) in the event of breach, where the
amount to be paid or lost is out of all proportion to the loss attributable to the breach. If
that is so, the provisions are likely to be regarded as penal because their function is to
act as a deterrent."

14.

In that case, the defendant was likely under provisions designed to recalculate the sale
price to lose tens of millions of pounds in circumstances where, for various reasons, the
claimant could not recover any monies at all for the breach of contract. Lord Justice
Christopher Clark also explained the apparent criticism of this approach in previous
judgments in the following terms:
"It is however difficult to address any question of penalty without considering whether the
provision is extravagant, and, if it is, whether there is a commercial justification. I venture
to think that the difference in approach may not be as marked as it might appear
provided that (a) undue significance is not given to the discrepancy between the amount
payable under the clause and the loss that might be sustained on breach - the
significance of the discrepancy may depend on how closely the justification relates to the
nature or extent of the loss; (b) no presumptions are treated as irrebuttable; (c) proper

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account is taken of the desirability of upholding bargains freely entered into and of any
commercial justification for allegedly penal clauses, before deciding that the
predominant function of the clause is deterrent and that it is penal. That seems to me to
be the case here, not least because the relevant clauses fall foul of Lord Dunedin's
Proposition 4 (a) as well as having several other indicia of their penal nature. "
Accordingly, the appeal was allowed and the provisions were held to be not enforceable as
penalties. The court also declined to undertake a scaling down exercise of the clauses to
give them some effect on the basis, inter alia, that to do so would be to rewrite the bargain
the parties had made.
15.

16.

17.

However, just being able to show that there are circumstances in which the delay damages
exceed the probable actual loss is not likely to persuade a court to refuse to enforce the
agreed delay damages. See for example, Azimut-Benetti SpA v Healey [2010] EWHC 2234
(Comm); [2011] 1 Lloyd's Rep. 473 where a liquidated damages clause, which provided for
20% of the Purchase Price Sum to be paid if the contract for the purchase of a $37m yacht
was terminated, was upheld despite arguments that this was a penalty as at the time of the
contract the parties would not have considered a loss approaching 20% would be incurred
by the yacht builder if the contract was terminated. The court's view was that the clause had
a clear commercial purpose and was not a deterrent.
Secondly, the parties may argue that there is uncertainty in the wording of the clause which
makes the provision unenforceable; this is a particular issue when the parties do not use the
sectional completion provisions of the contract in respect of the works to be completed but
do seek to assess the liquidated damages by reference to completion of different sections
of the works. This was illustrated by the case of Bramall & Ogden Ltd v Sheffield City
Council 29 B.L.R. 73 where the parties agreed to deduct liquidated damages at the rate of
20 per week for each uncompleted dwelling but did not amend the contract to provide for
sectional completion. The employer could therefore, in theory, have waited until all the
works (including the houses and the other works) were complete before taking possession
of any of the houses and claim liquidated damages for the entire period of culpable delay.
The ambiguity in the liquidated damages clause had to be construed contra proferentum
and so could not be construed in a way that would assist the employer. Another example is
Bruno Zornow (Builders) v Beechcroft Developments 51 B.L.R. 16 where the court declined
to imply a term that there should be sectional completion where the court had implied a term
that the whole of the works were to be completed by 18 months from the date of
possession. The liquidated damages provision could only apply to a failure to complete the
works as a whole and not in phases as the employer had claimed. The architect's
calculations of liquidated damages were based on failure to complete blocks/flats which was
effectively a subdivision, even of the claimed sections, and were described by the Judge as
"hopelessly misconceived".
Thirdly the parties may have made an error when completing the contract, for example,
where "nil" was included in the liquidated damages provision, which was interpreted as no
liquidated or general damages being recoverable Temloc Ltd v Errill Properties Ltd 39
B.L.R. 30. Another example is where the provision imposed a potential liability for the
defaults of others for whom the contractor liable to pay liquidated damages is not
responsible, see, for example: Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine
Business Services Ltd [2008] EWHC 426 (TCC); [2008] 2 All E.R. (Comm) 493. In that case
the contractor (on the wording of a bespoke clause adapted from the "FIDIC Silver Book")
was not responsible for liquidated damages for an overall delay to the works because the
bespoke clause in issue imposed a penalty. On the wording of that clause the contractor's
liability for liquidated damages could include liability for liquidated damages for delayed
wind turbine generator (WTG) by reference to each MW of electricity for each WTG that was
delayed due to the default of the wind turbine contractor (WTC) for whom the contractor
was not responsible. This outcome may have been avoided if the contract had included
sectional completion for each WTG so that the contractor could obtain an extension of time
for the WTGs that were delayed by the WTC.

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18.

There are some other relatively rare instances where the court have found that a payment is
a penalty and not enforceable. In the commercial context this is rare,for example, see the
comments of Mr Justice Akenhead in the Braes of Dourne case above in which he noted "It
is certainly unusual for liquidated damages clauses to be found to be unenforceable". This
can, however, happen (as it did in the Braes case and also in Bramall and Ogden (above)).
Another example is the case of CMC Group Plc v Zhang [2006] EWCA Civ 408 where an
agreement to settle claims contained a provision requiring the settlement sum to be repaid
in the event of a breach of the settlement agreement, which was found to be an
unenforceable penalty. In the event that the liquidated damages clause is found to be
unenforceable as a penalty, that does not usually preclude the rights of the employer to
claim unliquidated damages for delay, for example, see Bramall and Ogden (above) in
which the matter was remitted to the Arbitrator. Judge Hawser noted that "My finding does
not in any event prevent the respondents from claiming damages for breaches of the
contract". Although the commentary in Keating (above) at para.10-010 suggests that there
may be limits on such a claim if the unliquidated damages claim exceeds the amount which
is unenforceable as a penalty.

Key Acts
Housing Grants, Construction and Regeneration Act 1996

Local Democracy, Economic Development and Construction Act 2009

Key Subordinate Legislation

Scheme for Construction Contracts (England and Wales) Regulations 1998/649

Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England)
Regulations 2011/2333

Key Quasi-legislation
None.

Key European Union Legislation

None.

Key Cases
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] A.C. 79

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Alder v Moore [1961] 2 Q.B. 57

Suisse Atlantique Societe d'Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 A.C. 361

Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd 1 B.L.R. 111

Bramall & Ogden Ltd v Sheffield City Council 29 B.L.R. 73

Temloc Ltd v Errill Properties Ltd 39 B.L.R. 30

Bruno Zornow (Builders) v Beechcroft Developments 51 B.L.R. 16

Philips Hong Kong Ltd v Attorney General of Hong Kong 61 B.L.R. 41

Jervis v Harris [1996] Ch. 195

Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC); [2005] B.L.R. 271

CMC Group Plc v Zhang [2006] EWCA Civ 408

Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] EWHC
426 (TCC); [2008] 2 All E.R. (Comm) 493

Azimut-Benetti SpA v Healey [2010] EWHC 2234 (Comm); [2011] 1 Lloyd's Rep. 473

Berg v Blackburn Rovers Football Club & Athletic Plc [2013] EWHC 1070 (Ch); [2013] I.R.L.R. 537

Thameside Construction Co Ltd v Stevens [2013] EWHC 2071 (TCC); [2013] B.L.R. 543

Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539

Key Texts
Keating on Construction Contracts 9th Ed. para.20-139, paras 10-014-10-017

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Analysis
KEY AREAS OF COMPLEXITY OR UNCERTAINTY

1.

2.

3.

4.

There are three specific areas of complexity in addition to the general issues about
enforceability highlighted above. Those are: firstly sub-contracts; second the application of
liquidated damages after termination of the employment of the contractor; and thirdly the
relationship with Adjudicator's Decisions, particularly whether delay damages can be set off,
withheld or deducted from a sum following an Adjudicator's Decision.
Sub-Contractors: often the contractor will seek to pass on liquidated damages to
sub-contractors. This can create arguments about the extent to which various
sub-contractors are responsible, effectively for the same damages. Imposing liquidated
damages as an exhaustive remedy for breach of the sub-contract is uncommon as it is often
difficult for the contractor to realistically assess what those losses might be. Sub-contractors
may also seek a limit (commonly 10%) of the Contract Sum of any such damages.
Liquidated Damages After Termination of the Employment of the Contractor: most
construction contracts include provisions for determination of the employment of the
contractor by the employer (see for example, JCT Design and Build clause [8.4]). Generally
liquidated damages will continue after termination up until practical completion under the
replacement contract to complete the works. Whilst this has been the subject of some
debate, this would seem to be correct as otherwise the employer, when faced with a
contractor in default, would have to determine the contract in order to replace the contractor
and then have potentially a lengthy period for which no remedy would be available, as no
liquidated damages would be payable by the first defaulting contractor.
Relationship With an Adjudicator's Decision: the courts have tried to deal with the
situation in which an Adjudicator makes a Decision in favour of a contractor but which does
not include the liquidated damages due to the employer. The employer will often seek to
rely on the liquidated damages provisions to then withhold or deduct against the
Adjudicator's Decision. The most recent case was Thameside Construction Co Ltd v
Stevens [2013] EWHC 2071 (TCC); [2013] B.L.R. 543in which Akenhead J. held the
employer under the Building Contract could not set off liquidated damages against the sum
due to the contractor in the Adjudicator's Decision. The usual approach of the Courts to
enforce Adjudicator's Decisions on a "pay now argue later" basis prevailed over the
apparent entitlement of the employer to a sum for liquidated damages.

LATEST DEVELOPMENTS

1.

The recent Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 judgment
has again opened up the question as to how far the courts will go when faced with what
appears to be a very substantial claim for liquidated damages from a party which has
suffered either no loss or a very small loss compared to the liquidated damages claimed.
The balance between enforcing the payment of a sum which is plainly not a genuine
pre-estimate of loss and the principle of keeping parties to freely negotiated commercial
agreements (the commercial justification argument) has again swung towards not enforcing
penalties. In these circumstances those negotiating and drafting liquidated damages
provisions should have in mind the comments made in that case that structuring the
provisions in a different way, say by making the payments conditional on performance
(rather than the consequences of a breach of contract), could have avoided the doctrine of
penalties being engaged at all.

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POSSIBLE FUTURE DEVELOPMENTS

1.

It is likely that the Courts' general approach to robustly enforce liquidated damages
provisions negotiated by the parties (particularly those of broadly equalled bargaining
strength) will now come under a period of renewed testing given the Court of Appeal
judgment in Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539. Generally,
the instances in which the court has refused to enforce liquidated damages clauses in
commercial contracts because the provisions are penalties have been rare. However, the
success of the defendant in the Cavendish Square case in a claim worth many tens of
millions of pounds is likely to make others facing substantial claims for liquidated damages
consider that it may be worthwhile exploring through the courts which side of this somewhat
flexible line the specific liquidated damages clause in their contract falls.

HUMAN RIGHTS

None.

EUROPEAN UNION ASPECTS

None.

Further Reading
None.

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