In this article, we look at liquidated damages in construction contracts and factors you should consider to ensure that the damages are not regarded as an unenforceable penalty. Whether you’re a contractor, employer, or advising construction clients, this guide will help you understand the commercial value of well‑drafted liquidated damages provisions and how the courts interpret them in practice.

What are liquidated damages?

Liquidated damages for late completion are a fixed contractual sum, agreed between the parties to a construction contract at the time of entering into the contract. They are recoverable by the Employer where a construction project fails to achieve practical completion by the date stated in the contract.  Where this occurs, liquidated damages can be deducted from sums otherwise due to the Contractor, or alternatively can be claimed by the Employer from the Contractor as a debt.

Typically a liquidated damages clause will specify a set rate payable per day or per week in the event of a delay. Unlike general damages for breach of contract, the claiming party is not required to prove that it has in fact incurred a loss.

Where are liquidated damages covered in the JCT Design and Build Contract?

In the JCT Design and Build 2024 Edition, liquidated damages are covered in clause 2.29. Before an Employer can deduct liquidated damages, they must follow the procedure set out in the contract as follows:

• Issue a certificate of Non-Completion.
• Notify the Contractor that it may require payment of, or may withhold or deduct, liquidated damages.
• Give notice to the Contractor setting out the amount of liquidated damages to be paid, withheld or deducted, not later than five days before the final date for payment under the Building Contract.

Once these conditions are satisfied, the Employer’s right to liquidated damages is crystallised.

What have the Courts held around liquidated damages?

The Courts have historically held that a liquidated damages clause should not act as a penalty clause. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1) provided guidance on the distinction between liquidated damages and penalties:

• Where a clause is labelled as a liquidated damages clause and says it is not a penalty, this doesn’t necessarily mean this is the reality.
• If the agreed sum is extravagant or unconscionable compared to the greatest loss that could have resulted from the breach, this could constitute a penalty.
• However, a sum will not be a penalty just because it is not possible to determine an accurate pre-estimate of the likely loss.

The Dunlop principles have been confirmed in more recent case law, in GPP Big Field LLP v Solar EPC Solutions (2). Although sums were expressly described in the liquidated damages clause as “the penalty”, this was not determinative of the validity of the clause. The sum was not excessive and represented a genuine attempt to estimate the potential losses the claimant could suffer in the event of a breach of contract. As such the liquidated damages were not a penalty despite being referred to in the contract as a penalty.

Cavendish Square Holding v El Makdessi and ParkingEye v Beavis (3) provided a modern application of the Dunlop principles. Here it was decided that where a clause is not a genuine pre-estimate of loss, this isn’t decisive as to whether the clause is a penalty. The general rule is that where a liquidated damages clause acts to protect a commercial interest, the courts will generally hold this to be enforceable.

Common drafting pitfalls you need to avoid

When you’re drafting liquidated damages provisions, you should consider how your agreed rate will be affected by:

1. Delays of less than a week (where weekly damages apply). You may need to include wording such as “or part thereof” so that the full weekly rate applies even if the delay is shorter than a full week.
2. Partial possession. If your contract doesn’t include a clear mechanism for reducing the liquidated damages rate when you take possession of only part of the works, your liquidated damages clause may become unenforceable and stop applying altogether.

If you’re acting as either Employer or Contractor under a Building Contract (or advising such parties), you should consider whether liquidated damages make commercial sense for inclusion in your Contract. When entering into such clauses, bear in mind that these need to be clearly drafted, reasonable, protect a commercial interest and should not act as a penalty. You should review your current contracts and consider whether any liquidated damages provisions would be enforceable.

How we can support you

If you require support in drafting, negotiating or interpreting liquidated damages clauses in a construction contract, or require advice around this issue generally, please reach out to Carly Thorpe or Juliet Gough. We would be happy to assist you.