Liquidated damages - be careful how you draft them

Over the last few years, the courts have shown themselves to be increasingly unwilling to interfere in the level of liquidated damages set in building contracts. The courts have taken this position predominantly because the agreed level of liquidated damages forms part of the commercial bargain reached between the parties at the outset of the contract. However, employers should still carefully calculate the level of liquidated damages inserted into the contract for the following reasons:

1. Most employers who regularly enter into building contracts will be aware of the longstanding requirement for liquidated damages to be a “genuine pre-estimate of loss”. Notwithstanding the courts’ current approach, this is still good law and employers should ensure that they can justify the level of liquidated damages set.

2. If the clause is overcomplicated, this can jeopardise a claim for liquidated damages. The case of Bramall & Ogden v Sheffield City Council (1983) found that the Council could not enforce liquidated damages expressed as “£20 per week for each uncompleted dwelling” where partial possession of a housing estate of 123 houses and other works was taken in phases and the building contract did not allow for sectional completion. Again, though this case was decided 30 years ago, it currently remains good law.