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.