In the course of any projects, things have the potential to go wrong, despite careful planning and negotiation.
Construction projects have the added challenge of requiring substantial investment, strict health and safety protocols and a long supply chain with rigorous quality assurance processes.
For this reason, it’s a good idea to plan ahead for the possibility of delays, in order to avoid the disputes which typically arise when the project or payment is delayed.
One of the ways this can be achieved is through implementing liquidated and ascertained damages (LADs) within a construction contract.
What are LADs?
LADs take the form of a pre-agreed sum of money per specified period, payable upon breach of contract due to delays or quality issues by the breaching party.
They must:
- Be a fixed amount
- Specify a time period after which LADs are due
- Be fair and proportionate to the other party’s interest in the project.
For example, if a contract specifies LADs of £2,000 per week, and the contractor makes an error that delays the project for three weeks, then they may be liable to pay £6,000 to the other party as per the terms of the contract.
They are agreed at the outset of a contractual relationship and are intended to represent a genuine estimation of losses in a specific circumstance.
Many businesses favour them because they provide:
- Certainty in the event of a culpable delay
- A limitation on the liability in the event of a breach of contract
- A way of heading off disputes before they arise.
Are LADs enforceable?
LADs are part of a legally binding contract, making them enforceable as long as they were agreed and documented correctly and in line with the law.
You do not need to document losses with an LAD agreement, only that the primary obligation under the contract was not fulfilled.
One of the most common issues with LADs is the concept of ‘fair and proportionate’ compensation. LADs are not penalties as such and must therefore be set in line with the legitimate interests of the other party in the project.
You should also ensure that LAD clauses are:
- Unambiguous
- Secondary to the primary clause of completing the work
- Not claimed in situations where the contractor has been prevented from carrying out the work by the other party.
When used correctly, LADs can be an effective way of preventing disputes and escalation to litigation and can help to protect long-term working relationships.
Need advice on LADs? Contact our team to discuss your requirements.