Exploring Liquidated Damages: Implications in Construction Agreements

Verified

Added on  2023/06/15

|5
|684
|424
Report
AI Summary
This report provides an internal memo discussing the primary legal and practical implications of liquidated damages in construction contracts. It highlights the distinction between liquidated damages and penalties, referencing key cases such as Cavendish Square Holdings v Makdessi, Parking Eye Limited v Beavis, and Dunlop v Matthew Tyre Co Limited v New Garage Motor Co Limited. The report emphasizes that while employers are not always required to prove actual estimated loss under liquidated damage provisions, contractors can challenge the provision if it fails to represent the pre-estimated loss or is deemed a penalty clause. The analysis underscores the importance of reviewing liquidated damage provisions to evaluate the validity of claims and determine whether they can be challenged, framing it as a primary legal obligation.
Document Page
Running head: CONSTRUCTION CONTRACTS IN CONTEXT
Internal Memo
Name of the student:
Name of the university:
Author note
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
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).
Document Page
2CONSTRUCTION CONTRACTS IN CONTEXT
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
Document Page
3CONSTRUCTION CONTRACTS IN CONTEXT
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
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
4CONSTRUCTION CONTRACTS IN CONTEXT
chevron_up_icon
1 out of 5
circle_padding
hide_on_mobile
zoom_out_icon
[object Object]