Definition
Liquidated Damages(LDs)
Pre-agreed sums payable for defined delays or failures.
Liquidated damages are a pre-agreed sum specified in a contract that a supplier must pay if it fails to meet a specific obligation, most commonly a delivery or completion deadline. They are designed to be a genuine pre-estimate of the buyer's likely loss, not a penalty, and are common in works and major project contracts.
How liquidated damages clauses work
Rather than requiring the buyer to prove and quantify actual loss after a delay or failure, a liquidated damages clause fixes the amount payable in advance, usually expressed as a daily or weekly rate for late completion. This gives both parties certainty and avoids lengthy disputes over the calculation of loss.
For a liquidated damages clause to be enforceable, the sum must be a genuine attempt to estimate likely loss; a clause set deliberately high to punish rather than compensate risks being challenged as an unenforceable penalty, though the modern legal test for this is nuanced and any dispute should be assessed with legal advice.
What suppliers should check before bidding
- The daily or weekly rate and whether it is capped at a maximum amount
- What triggers the clause, e.g. missed milestone, late completion, or specific defects
- Whether the rate is proportionate to the likely value of the delay to the buyer
- Whether the clause interacts with other remedies such as termination rights or general damages
Frequently asked questions
- Are liquidated damages the same as a penalty clause?
- No, and the distinction matters legally. Liquidated damages are meant to be a genuine pre-estimate of loss and are generally enforceable, while a clause designed purely to punish the supplier rather than compensate the buyer risks being unenforceable as a penalty, though this is a nuanced area of contract law.
- Can liquidated damages be negotiated before signing a contract?
- Sometimes, particularly the daily rate or the presence of an overall cap, though public sector buyers often present standard terms with limited room for negotiation depending on the framework or procurement route used. Any concerns should be raised early, ideally through the clarification process.
- What happens if actual losses are higher than the liquidated damages sum?
- Generally the buyer cannot claim more than the specified liquidated damages amount for the type of loss the clause covers, which is part of the certainty the mechanism provides, though this depends on the exact drafting and legal advice should be sought for specific disputes.
Related terms