ARNOULD H. CANDIDO H.W.

#2
CONSTRUCTION MANAGEMENT 3:00PM – 4:30PM (T-TH)

WHAT ARE LIQUIDATED DAMAGES IN CONSTRUCTION “CONSTRUCTION OF THE TWO-STOREY SCHOOL

CONTRACTS? BUILDING FOR VSU ISABEL CAMPUS”
Liquidated damages in construction contracts are the
mechanism through which one party can claim monetary
compensation for loss or damage that occurs as a result of the
other party’s failure to deliver the works, goods or services under
the contract on time.

The distinction between liquidated damages and

general damages is that the former is a fixed rate or amount in
the contract between the parties, whereas the latter is an
amount determined by a court when it hears the matter.

You can find liquidated damages clauses in many

contracts, not just those in the construction industry. They can
be used to claim compensation for various breaches of a party’s
obligations under the contract. For construction contracts, the
parties will likely claim this type of damage where there are
substantial delays, and the contractor fails to meet the practical
completion date.

WHY HAVE LIQUIDATED DAMAGES CLAUSES?

Liquidated damages clauses operate to incentivize
each party to complete their obligations under the contract on
time. The principal can recover their loss without having to prove
their actual loss, and the contractor will have certainty that the
contract will cap their liability for damages at a certain amount.

The parties will usually agree to the liquidated

damages clause before signing a contract. So, a court will
enforce the provision, as each party is expected to hold up their
end of the bargain. However, there are limits on the
enforceability of liquidated damages clauses.

WHEN WILL THE AMOUNT OF LIQUIDATED DAMAGES BE

CONSIDERED A PENALTY?
The Court noted that whether a sum stipulated is a
penalty or enforceable liquidated damages will depend on the
LIQUIDATED DAMAGES IN THE CONTRACT
circumstances of each contract. The court then went on to list a
number of useful tests that aid the assessment. To summarize,
a sum will be a penalty if:

 The amount is extravagant and unconscionable when compared

to the greatest loss that flows from the breach;
 The breach is solely for non-payment of a sum of money, and
the amount the aggrieved party is trying to claim exceeds the
sum that should have been paid; and
 The amount is a single lump sum payable on the occurrence of
one or multiple events which vary in seriousness, with some only
warranting trivial damages.