One reoccurring question we at Silver Shemmings Ash LLP are posed by our clients is whether the liquidated damages stipulated in the contract is enforceable when the employing party has incurred little or no loss as result of any delay in completion
A penalty clause is where the sums of money inserted into a contract are extravagant and unconscionable, and the purpose being to coerce a party to performance. A penalty clause is unenforceable, and the sum is irrecoverable
Liquidated damages, on the other hand, are enforceable provided they represent a genuine and reasonable pre-estimate of the loss likely to be incurred as a direct result of a breach (such as delay) or a lesser sum, as assessed at the time the contract was entered into. It is irrelevant if the employing party subsequently incurrs little or no loss as a result of the delay
So, where you have entered into a contract and signed in agreement to the application of a liquidated damages on late completion, but the sum stipulated can be evidenced as not being a genuine and reasonable pre-estimate at the time the contract was entered into, the liquidated damages will be unenforceable and damages will be rendered “at large” and which must be proven
Obviously, the actual loss that can be proved by the employing party will be substantially less than the liquidated damages stipulated in the contract.
This article was originally written and published on the internet by Silver Shemmings Ash LLP on 28/08/18
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