Chapter 12 Why use liquidated damages clauses?
From the perspectives of both principals and contractors, there are many benefits of including a liquidated damages clause in a contract.
Liquidated damages clauses can:
- remove the need for the non-breaching party to prove or quantify the actual damage suffered;
- provide certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach;
- quantify risk allocation and the certainty of the parties’ intentions;
- provide a more certain method of dealing with the allocation of unusual risks in calculating the amount of loss that the parties may take into account;
- encourage contract compliance because they are ‘self-enforcing’ (i.e. do not require litigation to be enforced);
- provide an appropriate means of incentivising a contractor to perform the works by the date for completion;
- allow the contractor, at the time of tender, to price its exposure (i.e. damages) payable in the event of certain breaches of the contract;
- provide the contractor with a basis for comparing the cost of accelerating to achieve practical completion by the date for practical completion with the liability for breach;
- establish a cap on the liability (these caps can operate in a number of ways) of the contractor for certain breaches of the contract; and
- allow the principal to recover irrespective of the amount of actual loss.