Contracts
Liquidated damages: when can they be deducted?
The short answer
Liquidated and ascertained damages (LADs) are a sum fixed in the contract, payable by the contractor for each day or week completion is late. They replace the employer having to prove actual loss. Three things must be satisfied before any deduction: the completion date must have passed without practical completion, any extension of time due must have been granted, and the contract’s notice requirements must have been followed. A rate set so high that it is out of all proportion to the employer’s legitimate interest can be struck down as a penalty, in which case the employer is left proving actual loss instead.
At a glance
- What they are
- A pre-agreed rate for late completion
- Purpose
- Removes the need to prove actual loss
- Condition 1
- Completion date passed
- Condition 2
- Extensions of time properly assessed
- Condition 3
- Contractual notices served
- Stop date
- Practical completion
- Penalty test
- Out of all proportion to a legitimate interest
- If clause fails
- Employer must prove actual loss
What has to happen before a deduction is lawful?
- 01The completion date has passed. The date as extended, not the one in the original contract. An employer who has not dealt with outstanding extension claims does not yet know the date.
- 02Extensions of time have been assessed. Where the contractor is entitled to time, the date moves. Deducting against a superseded date is the commonest error.
- 03A non-completion certificate or equivalent has been issued. Most forms require it, and it is a condition of the right to deduct rather than a formality.
- 04Any required notice has been given. JCT requires the employer to notify an intention to deduct. Skip it and the deduction fails, however late the job was.
- 05A [pay less notice](/blog/what-is-a-pay-less-notice) has been served in time. Deducting LADs from a payment without one means paying the notified sum in full.
Late completion does not by itself entitle anybody to money. The sequence has to be followed, and every step of it is a place a deduction can fail.
When is the rate a penalty?
The old test asked whether the sum was a genuine pre-estimate of loss. The modern test, from the Supreme Court in Cavendish Square v Makdessi, asks whether the clause imposes a detriment out of all proportion to the innocent party’s legitimate interest in performance.
In practice the modern test is harder for a contractor to satisfy. A rate that is generous to the employer is not automatically a penalty, and courts are reluctant to interfere with a rate two commercial parties agreed. A rate with no relationship to any conceivable loss remains vulnerable.
NoteStriking down the clause does not help the contractor as much as it sounds. The employer is then free to claim actual loss at common law, which on a commercial building can be considerably more than the LAD rate.
What happens if the employer causes the delay?
The prevention principle applies. Where the employer causes delay and there is no mechanism to extend time for it, time is set at large: the obligation to complete by a fixed date falls away, the contractor must finish within a reasonable time, and the LAD clause becomes unenforceable.
This is why extension of time clauses list employer risk events at length. The clause protects the employer more than the contractor. Without a route to extend time for the employer’s own acts, the employer loses the right to damages entirely.
An employer who refuses every extension claim is not protecting the LAD position. They may be destroying it.
How are they calculated and capped?
The rate is stated in the contract particulars, usually per day or per week, and runs from the completion date to practical completion. Sectional completion means a rate per section, and partial possession reduces the rate in proportion to the value of the part taken.
| Feature | Effect |
|---|---|
| Rate per week | Applied to whole weeks or pro rata, as the contract states |
| Cap | Often 5–10% of contract sum; check whether one exists at all |
| Sections | Separate rate and date for each |
| Partial possession | Rate reduced proportionally to the value taken |
| Stops at | Practical completion, not handover of documents |
A cap is worth negotiating at tender. Uncapped LADs on a long job can exceed the margin several times over, and the point to raise it is before signing rather than when the deduction lands.
Questions
Frequently asked
Can an employer deduct LADs from a payment application?
Only by serving a valid pay less notice before the deadline, and only if the non-completion certificate and any required notice of intention to deduct are in place. Without those, the notified sum is payable in full.
Do liquidated damages stop at practical completion?
Yes. They run from the completion date to the date of practical completion, which is one reason certification of practical completion is so often disputed.
What if the contract does not state a rate?
If the rate is left blank or entered as nil, most forms treat it as no liquidated damages. The employer can still claim general damages for late completion, but must prove the loss.
Are liquidated damages the same as a penalty?
No. A liquidated damages clause is enforceable; a penalty is not. The line is whether the sum is out of all proportion to the employer’s legitimate interest in the works being finished on time.
Can LADs exceed the contract value?
In theory yes, if there is no cap and the delay is long enough. This is exactly why caps are negotiated, and why an uncapped clause on a long programme deserves attention at tender.
Read next
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Section 111, the deadline, and why a late notice means you pay the notified sum in full.
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