Primary Legal and Practical Implications of Liquidated Damage in Construction

This internal memo discusses the legal and practical implications of liquidated damage in construction contracts. It explains the distinction between liquidated damages and penalties, and advises that the provision of liquidated damage should be reviewed to determine whether a claim can be challenged.

Running head: CONSTRUCTION CONTRACTS IN CONTEXT
Internal Memo
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1CONSTRUCTION CONTRACTS IN CONTEXT
Internal memo
To,
Contract team/ project control office
From,
Contract’s Manager
Subject: primary legal and practical implication of liquidated damage in construction
It is a common fact that the contractor of a commercial contract will suffer
irreparable loss if the project delays and the profit margin will also be affected by that. In
every contractual agreement, there are certain provisions on the liquidated damage to protect
the employer or the contractors to sustain loss from the project. However, it has been advised
that the provision of liquidated damage has been widening by the Supreme Court and it is
therefore, required to be applied after proper evaluation.
While considering the scope and impact of the liquidated damage in commercial
contracts or construction, the Court has made a distinction in between the liquidated damage
provision and law of penalties in the light of two historical cases of Cavendish Square
Holdings v Makdessi and Parking Eye Limited v Beavis. It has been observed by the court
that the employers are not mandatorily required to prove the actual estimated loss under the
liquidated damage provision and options are still open for them to make claim for liquidated
damage. However, if the liquidated damage is unable to characterize the pre-estimated loss of
the employer, the contractor can challenge the provision on the basis of penalty clause1.
The difference between the liquidated damage and penalties has been established for the
first time in the case of Dunlop v Matthew Tyre Co Limited v New Garage Motor Co
1 Nicholson, Alex. "Too entrenched to be challenged? A commentary on the rule against contractual penalties
post Cavendish v Makdessi and ParkingEye v Beavis." European Journal of Current Legal Issues 22.3 (2016).

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Limited2 . It had been observed by the court that penalty will be imposed on the parties if any
breach has been made against any contractual terms and the breach must be extravagant and
unconscionable. In the case of Cavendish Square Holdings v Makdessi3, it has been
observed by the court that where the level of liquidated damage does not represent the pre-
estimate loss of the employer and failed to justify the commercial credibility, it will be
excluded from the provision of penalty clauses. It has further been observed by the court that
in case of penalty, the nature of liquidated damage clause should be penal and
unconscionable and where the clauses are primary; the breaching parties are required to pay
the liquidated damage only for delay in the work. The court was of the view that liquidated
damage is different from penalty as it is extended beyond the recovery of financial loss and
the same principle has been established in Parking Eye Limited v Beavis appeal4.
Therefore, it can be concluded that the provision of the liquidated damage should be
reviewed for evaluating the claim made by the employer for the purpose to determine
whether the application for claim can be challenged or not and it has a primary legal
obligation.
Kind Regards Dated:
Signed
Contract’s Manager
2 (1915) AC 79.
3 [2013] EWCA Civ 1539
4 [2015] UKSC 67

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Reference:
Cavendish Square Holdings v Makdessi [2013] EWCA Civ 1539
Dunlop v Matthew Tyre Co Limited v New Garage Motor Co Limited (1915) AC 79.
Nicholson, Alex. "Too entrenched to be challenged? A commentary on the rule against
contractual penalties post Cavendish v Makdessi and ParkingEye v Beavis." European
Journal of Current Legal Issues 22.3 (2016).
Parking Eye Limited v Beavis appeal [2015] UKSC 67

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