Liquidated Damages Clause - Coursework Example

Construction Law University’s Name Submitted by Names: Tutor: Date: Liquidated Damages Clause According to assumption by law and economist scholars, human beings are rational wealth-maximizers and those individuals can decide to breach a contract when the legal remedy for breaching a contract is associated with expectation damages (Wilkinson-Ryan, 2010). In other word, if the promisor is in a position to make extra money by breaching a contract, then he is most likely to breach a contract (LaFiura and Sager, 2000). Consequently, there was the emergence of liquidated damages clauses in many countries that clearly explains that contractual provisions that are used to specify the damages that arise when there is a breach of contract between the contracting parties. Liquidated damages clause is put in place to ensure that a breach of contract leaves no party in the contract worse off and it ensures fairness. The essay, therefore, focuses on the liquidated damages clause by looking at its validity, invalidity, advantages and disadvantages in a construction contract. The essay first defines the valid and invalid liquidated damages to get a clear difference between the two terms before looking at the differences between liquidated damages and general damages. The essay also covers the purpose and benefits of liquidated damages in construction contracts. Other of related to liquidated damages that are covered in the essay include operation of the liquidated damages clause, information on delay issues, and the advantages and disadvantages of the liquidated clause for both employer and contractor in a construction contract. The areas are comprehensively covered in the essay to clearly understand liquidated damages in a construction contract. Parties entering a contract can decide to stipulate the amount of damages in the case of a breach, which is always a subject to certain constraints. The first constraint stipulates that it should be difficult to prove the actual damages (Vitkus, 2010). Secondly, the damages should be realistic and reasonable when drafting the contract. Some contract laws in other countries also stipulate that liquidated damages should not be significantly different in comparison to the actual damages. In addition, liquidated damages clauses in many jurisdictions spell out that the clauses must be aimed at compensating the non-breaching party rather than imposing penalties on the potential breacher. The liquidated damages should not give room for punitive damages when there is a breach of contract. Therefore, the liquidated damage is invalid if it does not respect the above constraints and it aims at punishing the breacher. Liquidated damages, therefore, refers to the amount of money that are agrees upon by the contracting parties that they are likely to pay to one another in the case a breach of contract (Pearce and Halson, 2008). However, the liquidated damages are only valid if the damage is uncertain or hard to quantify, and the damages are acting as damages and not as penalties. If the liquidated damages do not adhere to the above criteria then they are considered invalid, and, therefore, the clause is null and void. Therefore, liquidated damages are different with penalties and they must be genuinely calculated when the contracts are being drafted. Any liquidated damage that is not genuine is considered to be a penalty, which will make in enforceable in a court of law, making them invalid liquidated damages (Hillman, 1999). A liquidated damage is valid where it adheres to all the conditions that are required by the liquidated contract clauses and it is invalid if it contravenes or contradicts the clauses. Both general damages and liquidated damages are legal terminologies that are common in many contracts. Generally, damages are monetary compensation to a party in cases of a loss, which can be in form of injury or any other losses that can occur to an individual (Sanders, 2008). Not all damages are included in a contract because they are so many. Therefore, the main difference between general damages and liquidated damages is that the former entails damages for non-monetary losses to the plaintiff while liquidated damages are agreed upon by the contracting parties, which are to be paid by a party who has breached a contract to individual who has not breached a contract (Sanders, 20080. The damages are called general because it is not easy to exactly assess them and they are the damages that law presumes to be found in any breach of contract (Gotanda, 2003). Some of the general damages include personal injuries like pain and loss of amenities or properties. Contrary to general damages, liquidated damages are hard to foresee and they are used when it is difficult to estimate the actual loss or harm in case of a breach of a contract. In addition, liquidated damages should not be punitive, but they should be fair because they are aimed at compensating the party in the receiving end instead of punishing the breacher of the contract (Maríngarcía, 2012). However, general damages naturally flow from the wrongful doing of the defendant and there is a clear relationship between the behavior of the defendant and the loss by the plaintiff. In addition, general damages require non-defaulting party to prove that actual losses have occurred due to a breach of contract while at the same time the damage should not be too remote. However, in the case of liquidated damages, the employer or the non-defaulting party is only required to prove that a breach has occurred. There is always a controversial debate on whether general damages should be awarded in the case of a breach of contract. The common argument is that some of the general damages are non-financial, which make the unforeseeable when there is a breach of contract (Jarosz, and Chapman, 2013). For instance, a breach of contract can lead to anxiety and psychological problems to the affected party. However, many laws have no provisions that they can use to ward such emotional and incidental frustrations. However, there are some instances where such damages are awarded, leading to a controversy on the general damages. Liquidated damage is common in construction contracts because of the important roles that it plays between the employer and the contractors. The main purpose of liquidated damages in a construction contact is that it enables all the parties entering the contract to know from the onset the damages that will be applicable when there is a breach of contract. It is also difficult to know and assess the actual damages that arise out of late completion of a construction constructs, but the challenge can be avoided by through the use of liquidated damages (Tyler, 1994). Therefore, liquidated damages help in simplifying the damages that are associated with the construction contracts, which sometimes are very costly to the employer. It is also advantageous to use liquidated damages, as it is less expensive in comparison to proving actual damages in a construction project. Proving the occurrence of actual damage is expensive, time consuming because it involves a number of professionals like lawyers, engineers, consultants, and experts witnesses who demand a lot of money. In addition, in order to identify the net recovery, the affected party must deduct all of the expenses that emanates from the actual damages (Tyler, 1994). However, with the use of liquidated damages, the affected party spends relatively little money to prove the amount of damages. Therefore, the use of liquidated damages is important in the construction contracts because it simplifies the process and it reduces the cost of proving the damages that occur when there is a breach of contract. Liquidated damages are also beneficial in a construction contracts because it is the best substitutes for consequential damages in a construction project. The contracting parties can easily avoid the controversies surrounding the consequential damages by including potential consequential damages in the liquidated damages. In addition, liquidated damages is advantageous to the construction contracts because it enables the predictability of the cost involved, as it helps in balancing the anticipated performance cost and the breaching cost (LaFiura and Sager, 2000). Another advantage of the liquidated damages is that it enables the contracting parties to come up with mutually agreeable compensation in case of a breach, which is important in avoiding legal fees in settling the conflict. According to the UK law, a liquidated damages clause gives room to the parties entering the contract to come up with the damages that are recoverable if there is a breach of contract. The advantage of the clause is that it is simple and it can easily be enforced if there is a breach in the contract. Any party to the contracts who is seeking to execute the clause only needs to prove a breach of the contract (LaFiura and Sager, 2000). In addition, the clause does not require the party to prove that he or she has suffered a loss due to the breach of contract. The clause also stipulates that the court has no role to determine the amount recoverable by the affected party to the contract. However, there is a controversy about the rule that specifies if the clause operates as liquidated damages or as penalties. In addition, the UK court is reluctant in executing contracts that are punitive or oppressive, but they it respect the commercial contracts that have been freely agreed upon by the contracting parties. The primary purpose of the liquidate damages clause is to compensate the innocent party to the contract any damage that is associated with the breach of the contract (Lee, Lee and Wang, 2009).The intention of the clause should not apply undue force on the individual performing the contract. However, if the intention of the clause is to apply undue forces, then it will be considered a penalty, making it unforeseeable and therefore invalid. The amount specified in the clause should also be genuine in relation to the anticipated loss in case of a breach of a contract. In the case where the amount specified is not genuine or extravagant in comparison to the actual loss, then the clause will be considered to be a penalty and not liquidated damages clause. The court of law does not expect the amount contained in the contract to the same as that of actual loss, even though there is always some marginal errors allowed. In the case where different amount of money to be paid to different breaches are different, drafters should insert different sub-clauses in the contracts that specify the amounts to be paid in different contracts known as severance clause. The close is important in ensuring that in the event of invalidity or enforceability, the other part of the contract remains valid (Haseeb, Bibi and Rabbani, 2011). The liquidated damages clause should also specify that the amount is payable through a way of liquidated damages and that the agreement does not involve penalty. Therefore, there should be a clear difference between liquidated damages and penalty when drafting a contract. It is always the obligation of the contractors to complete the construction project within the specified time that is contained in the contract (Haseeb, Bibi and Rabbani, 2011). However, this is not always the case because many constructions always delay due to one reason or another that can come from the constructor or an employer. In a situation where the construction contract specifies the time in which a project should be completed, it is important to clearly state the commencement date to know the completion date in the contract. However, when the construction contract has no clear completion date, then, according to the English law, this implies that the construction project should be completed within a reasonable time. Under the circumstance, a reasonable time will be determines based on the facts by considering the issues around the project to be executed. Construction contracts always specifies that if a constructor fails to complete a project within the specified time contained in the contract, then the contractor is under obligation to pay the employer liquidated damages at a certain agreed rate from the time the project ought to have been completed to the actual date when the project will be fully completed. However, according to the English law, if the delay is caused by the employer, then he or she loses the authority to ask for liquidated damages (Sgarlata and Brasco, 2004). In the circumstance, the time is taken to be “at large” because the completion time specified in the contract can no longer be applied. There is also a time when the delay can be caused by both the employer and the contractor, which always calls for the extension of time. Finally, in the case where the delays are cause by external forces that are beyond the control of a contractor, he or she can ask for the extension of time and even the additional cost of the cost of the construction project (Sgarlata and Brasco, 2004). The constructor has the right to ask for additional payment for the project when the delay is caused by external forces that is beyond his control. Even though the delay is common in many construction contracts, it can be avoided by drafting a proper construction contracts. For instance, one of the construction delay cases in the UK was the one that was involving City Inn as the employer and Shepherd Construction Limited as the contractor. City Inn engaged the Shepherd to construct one of its hotels in Bristol in October 1997, and the date of completion of the project was 25th January, 1999. However, there was a conflict between the employer and the contractor due to the delay in the date completion (Farell, C. 2010). In 22nd July, 2010, the Scottish Court of Session found out that the delay was concurrent, as it was caused by both City Inn and the Shepherd. Despite the court decision, the case was still raising some emotive debate about, since the employer was claiming that the contractor was not entitled to the extension of time in the original construction contract. The liquidated damages clause in the construction contract is advantageous to both employers and contractors. The clause is a limitation to the contractors’ liability to any delay that can occur during the construction. It also allows the contractor to clearly understand and analyze the risk associated with late completion, which motivates him to complete the project in time. The clause also gives the room for the extension of time and extra payment in case of interference from external factors (Kheng, 2003). The clause is also advantageous to the employer because it gives him the right for compensation when there is a breach of contract. Employer can also benefit because the clause ensures that the project is completed within time. However, the clause can also be disadvantageous to both the employer and the contractor when either of the party breaches the contract because they have to compensate the affected party. In conclusion, it is important for any part entering the contract to include liquidated damages clause in the contract. The clause helps in saving time and reducing the cost of determining the amount of compensation when there is a breach of contact. However, it is important for the contracting parties to adhere to the principles of the clause and to be genuine for the clause to be valid. The drafters of the construction contracts should make should that it is comprehensive to avoid any possible loophole that can make it invalid. However, the liquidated clause is advantageous for both employers and contractor despite some disadvantages. Reference List Farell, C. 2010. City Inn Vs Shepherd Construction: concurrent delay. Retrieved from http://www.building.co.uk/city-inn-vs-shepherd-construction-concurrent- delay/5004299.article Gotanda, J.Y., 2003. Punitive damages: a comparative analysis. Columbia Journal of Transnational Law, 42. Haseeb, M., Bibi, A. and Rabbani, W., 2011. Problems of projects and effects of delays in the construction industry of Pakistan. Australian Journal of Business and Management Research, 1(5), pp.41-50. Hillman, R.A., 1999. Limits of behavioral decision theory in legal analysis: The case of liquidated damages. Cornell L. Rev., 85, p.717. Jarosz, J.C. and Chapman, M.J., 2013. The Hypothetical Negotiation and Reasonable Royalty Damages: The Tail Wagging the Dog. Stan. Tech. L. Rev., 16, pp.769-833. Kheng, C.O., 2003. Extension of Time and Liquidated Damages in Construction Contracts. In Construction Contracts and Arbitration Seminar. LaFiura, D.R. and Sager, D.S., 2000. Liquidated damages provisions and the case for routine enforcement. Franchise LJ, 20, p.175. Lee, T.C., Lee, T.H. and Wang, C.H., 2009. Decision analysis for construction contract risk- sharing. Journal of Marine Science and Technology, 17(2), pp.75-87. MARÍN GARCÍA, I., 2012. Enforcement of Penalty Clauses in Civil and Common Law: A puzzle to be solved by the contracting parties. Pearce, D. and Halson, R., 2008. Damages for Breach of Contract: Compensation, Restitution and Vindication. Oxford Journal of Legal Studies, 28(1), pp.73-98. Sanders, J., 2008. Reforming general damages: A good tort reform. Roger Williams UL Rev., 13, p.115. Sgarlata, M.A. and Brasco, C.J., 2004. Successful claims resolution through an understanding of the law governing allocation of risk for delay and disruption. CM ejournal, CMAA, Available from http://cmaanet. org/ejournal. php. Tyler, S.M., 1994. No (Easy) Way Out:" Liquidating" Stipulated Damages for Contractor Delay in Public Construction Contracts. Duke Law Journal, pp.357-435. Vitkus, S. 2010. THEORETICAL AND PRACTICAL ASPECTS OF LIQUIDATED DAMAGES AND APPLICATION UNDER THE LAW OF THE REPUBLIC OF LITHUANIA. Wilkinson-Ryan, T., 2010. Do liquidated damages encourage breach? A psychological experiment. Michigan Law Review, pp.633-671. Read More