A recent case has given cause for employers and their advisers to re-think about how they calculate the level of Liquidated Ascertained Damages (LADs) in construction contracts. The focus has moved from the precise sums included to the reason behind that level.
Until recently the level of LADs, the fixed sum payable per week of delay, was assessed by the courts on the principle that employers would work out a genuine pre-estimate of likely losses. For example, if a firm was moving offices but a contractor was late on the expected move-in date, the firm would charge a sum of their likely costs and losses I.E. loss of rental or other income from the completed development, additional financing charges, additional professional fees for longer site supervision, cost of new marketing, additional rental costs for alternative premises etc.
However the courts have recently changed the way in which LADs are legally interpreted to try and support the arrangement between the two parties. Instead of looking at the level of LADs, they look at the reason for the amount.
If a level of LADs has been calculated via a genuine pre-estimate and the figure is in the right ballpark, they will allow the employer to recoup the agreed fixed sum – they will uphold the parties’ bargain. On the other hand if the figure is outlandishly large and clearly being used as a deterrence for the contractor being late, then the court will strike the amount of LADs out as a penalty and those LADs cannot be recovered.
A prime example of this is the recent case of Azimut-Benetti SPA v Healy, where luxury Italian yacht builders Azimut-Benetti (AB) claimed for 20% of the contract price, which incidentally was €38 million, if the contract was terminated. When the contract was terminated, Healy complained, “The 20% was a penalty clause aimed at deterring breach which exceeded the maximum possible loss.”
To talk through the ins and outs of the case and LADs, we spoke to legal expert Sarah Fox of Enjoy Legal Learning.
She stated: “Since 1915 there has been a long line of construction cases, giving us a series of increasingly complex rules for determining what might be an acceptable level of LADs for delay on a construction project. In many of those cases, the courts approached the issue of whether the level of LADs was acceptable by a forensic analysis: a line-by-line review of all the employer’s losses. Whether or not an employer could recover might depend on what losses they actually incurred, compared to the ones they thought they might. This made us all into ‘mystics’ – trying to predict the future.”
She continued: “But now the courts have stepped back from having to review if the sum claimed is ‘excessive’, ‘unconscionable’, or if there is a ‘wide gulf’ between the amounts suffered and the amounts claimed. We are getting a pragmatic approach to LADs, which will help both parties.
The court wants to support commercial agreements, and as long as the figure for LADs is not so large as to clearly be intended to deter the contractor from completing late, then the courts are likely to uphold the level of LADs included in the contract.”
“This is a victory for commercial common sense.”
Sarah has been Highly Commended in the SCL Hudson Prize competition in 2011 for papers on construction law. If you wish to contact her, please email Sarah via: firstname.lastname@example.org