Deducting damages without losing them

Liquidated damages are a sum fixed in advance, payable for each week or day the works run past the completion date. They exist so that neither party has to prove actual loss, which is a genuine convenience for both. The employer does not have to evidence what the delay cost. The contractor knows the ceiling of its exposure before it prices the job.

The calculation

Damages run from the completion date after any extension of time to the date of practical completion, at the rate in the contract particulars, subject to any cap.

The word after is doing all the work. If an extension has been granted, the original completion date is irrelevant and every calculation based on it is wrong. If an extension is granted later, the calculation done earlier becomes wrong retrospectively.

Two steps that cannot be skipped

Under a JCT standard form the employer cannot simply deduct. Two things must happen first:

• The contract administrator must issue a certificate of non-completion, certifying that the contractor has failed to complete by the completion date.
• The employer must then give notice that it intends to deduct, before the deduction is made.

Both are conditions precedent. A deduction made without them is not merely irregular. It is ineffective, and the sum is repayable in full even where the delay was undisputed and the arithmetic was correct.

The certificate is not permanent

If a further extension of time is granted after the certificate of non-completion has been issued, the certificate is cancelled. It has to be reissued against the new completion date before any further deduction is made.

This catches people out because extensions are frequently granted late, sometimes long after damages have started being deducted. The correct response is to reissue and recalculate, not to leave the original certificate standing and adjust the figure quietly.

A rate of nil

Where the contract particulars state the rate as nil, or leave it blank and the parties intended nil, the usual position is that damages are not recoverable at all. It is tempting to read a nil rate as leaving general damages available at large, and that is generally not how it works: the parties are taken to have agreed the consequence of delay, and the consequence they agreed was nothing.

Whether that is the position on a particular contract depends on the drafting, and it is worth advice before anyone relies on it either way.

Caps

Many contracts limit damages to an aggregate percentage of the contract sum. Once the cap is reached the calculation stops, and continuing to accrue notionally beyond it serves no purpose except to make the schedule look wrong.

Sections

Where the works are divided into sections, each section has its own completion date and its own rate. Damages are calculated section by section and the totals added. Running a single calculation across the whole contract when the contract is sectional produces a figure that cannot be reconciled to anything.

The same applies where partial possession has been taken. Damages reduce proportionately for the part in the employer's possession, and a deduction that ignores that is exposed.

The practical order

Deal with any outstanding extension of time applications first, so the completion date is settled. Certify non-completion. Give notice. Then deduct, in the payment notice, showing the calculation. In that order, the deduction is defensible. In any other, it is an invitation.