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Liquidated Damages

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Norzul Ibrahim
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Hi Guys,

I’ve got one basic question about the above.

What is the different between Liquidated Damages (LD) and Liquidated Ascertained Damages (LAD). I notice the use of this terminology is quite interchangeable.

Thanks

norzul

Replies

Andrew Flowerdew
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Devamalya,

Would need more space than is available on this site but a few general cases that might cause LD clauses to be void would be:

1. LD’s represent an unenforcable penalty
2. Uncertainty in the wording of the clause
3. Breach of contract or act of prevention by Employer setting time at large
4. Non compliance with a condition precedent notice to with hold payment
5. Employer waived rights to LD’s

There’s no doubt others if I though hard enough but the above are probably the most common reasons.

Hopes it helps
Devamalya De
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Dear Andrew,

Just bugging u 1nc more. Can u PLZZZ let me know the circumstances/ grounds under which LD provision can be deemed void? Otherwise, ur elucidation of the LD/ULD aspect is just fine. Thanks a lot 4 the contribution. Know any books / resources on the Net which can give a comprehensive coverage of LD/ULD topics/cases etc.?
Andrew Flowerdew
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Devamalya,

Each legal system to it’s own but if it’s an LD case that has got to court, check whether the LD clause was held to be valid.

If held to be void then Employer will only get unliquidated damages, ie damages he can prove and if these damages are greater than the LD provision he would have got under the contract the court will usually use the contract value to cap the unliquidated damages. If what the Employer can prove is less than that which he would have been entitled too if the LD provision was valid then the Employer gets less.

If the LD clause is valid then the Employer usually should get the amount as calculated under the contract (usually LD rate x days delay) up to a maximum if the contract caps LD’s as in Norzul’s case.

eg LD’s $1,000 day - Contractor liable for 10 days delay, Employer due $10,000.

If LD clause held for whatever reason to be void and the Employer can only prove $6,000 loss then that’s all he’ll get. If the Employer can prove $14,000 loss then he will only usually get $10,000 as this was agreed at the time of making the contract as the Contractors liability.

If there was a cap on LD’s , say $5,000 maximum then in either case above the Employer would usually only get $5,000. Again if the actual amount the Employer could prove was say £3,000, then $3,000 is all he would get.

Similarly, if the cap was £20,000, ie the amount due had not reached the maximum then the Employer would get $10,000 if the LD provisions were valid or if the LD provisions were void, whatever he could prove upto but not exceeding £10,000.

Hope this helps
Norzul Ibrahim
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Simon,

I guess we are on the same wavelenght. With regards to the calendar day or work day, in our case it does not really matter coz contractor is working 7 days a week. But yu are right, it never hurts to include such distinction.

Thanks

NORZUL

** I’ve more to believe now that we have a strong case against the contractor.
Norzul Ibrahim
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Dear All,

Perhaps I didn’t clearly explain the LAD requirement. Actually, the contractor shall pay Owner 0.1% of Contract Price per day of delay upto a maximum of 10%. Meaning that the LAD is capped at a maximum of 100 days of delay. If the contract price is USD 300 million, then each day of delay should be USD 300,000. The maximum will then be capped at USD 30 million.

I think the above is clear now.

Thanks

NORZUL
Devamalya De
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Andrew,

I’m not quite getting the rationale behind your saying that even if the actual loss is less, the Client gets the LD amount. My knowledge of stand of the judiciary in LD cases in the subcontinent has been that: the Actual Loss (if less than LD amount) alone gets compensated and the full amount of the LD, only if the Actual Loss is more. Do you know of any global provision, Fidic guidelines etc. on the same which authorises payment of the full LD amount whatever be the Actual Loss? Please enlighten me on the same.
Andrew Flowerdew
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Simon,

I’m with you on that one
Simon Peter Cordner
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Agreed that it comes down to the actual language.

In the sample LD clause for discussion posted by Norzul, I would say that statement #2 pegs the actual loss as the LD amount, and would mean that any damages due to delay are summarized totally in the LDs. Loss of profit or any other conditional losses are included in the LD and they aren’t open to interpretation or discussion.

Regarding Norzul’s Case1, and using the sample LD language, the Owner cannot claim for anything other than the LD amount if a delay occurs. Additionally, the amount is pegged at $300k per day (0.1% of the contract price of $300M), meaning that a two-month delay would be worth around $18M, not $30M.

I also note that the LD calculation doesn’t distinguish between calendar day and work day. It never hurts to include such distinction.
Andrew Flowerdew
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All,

There seems to be abit of confusion here between liquidated (LD’s) and unliquidated damages (UD’s).

LD’s (or LAD’s) - genuine pre estimate of loss suffered by the Employer, usually because of delay, that is agreed as the Contractors liability for that breach at the time of making the contract. In calculating LD’s, loss of profit to the Employer can be included. A pre estimate is just that, an estimate, it does not have to be 100% correct, just a reasonable estimate of the Employers loss.

UD’s - all other losses incurred by the Employer. These have to be proven by the Employer in order to claim them but if for any given breach of contract, eg delay, there exists LD’s, then it is unlikely the Employer will be able to claim UD’s over and above the LD’s for that breach. It doesn’t stop the Employer claiming UD’s for other breaches of contract if cause and effect can be proven.

In the case of LD’s being deemed to be the Employers actual loss, it is saying that the LD’s are deemed to be his loss irrespective of whether the actual loss suffered is greater or less than the LD amount. So if the actaul loss is less, the Employer still gets the LD amount, if the actual loss is greater the same applies, he can claim no more.

If "potential loss" is taken to be the actual loss that the Employer incurs, ie it is not a pre calculated amount, then this loss is not a liquidated damage but an unliquidated damage that the Employer must prove. The wording would be all important as to whether the word potential can be taken to mean this or taken to mean the pre calculated amount equates to his potential loss.
Devamalya De
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Dear Norzul,

From the facts stated by you, a genuine pre-estimate of savings realized by the Client per year, on construction of the power facility is $60 m. On a pro-rata basis this translates to $5 m per month. So, any delay, beyond 2 months and upto 6 months, purely on account of the Contractor, the Client is liable to LD claims of anything between $ 10 m ($5 m /month x 2 months) to $30 m ($5m /month x 6 months). Additional claim, (apart from the savings aspect you have pointed out), if any, has to be substantiated by the Client on the basis of facts. Beyond 6 months of delay on the part of the Contractor, the Client can surely claim the full amount of the LD.
Norzul Ibrahim
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Dear Demavalya,

This is my earlier question regarding the LAD:

Dear All,

Is there a universal accepted definition of "damages". Can I consider this as one of the damages:

Case1
Company A pays $ 120 million per year for its electricity and other utilities bill. In the pursuit to reduce the operating cost, it has planned to construct its own power plant which will enable to reduce the operating cost by $ 60 million per year. The cost of project is about $ 300 million. In the contract with the contractor it has included the LAD clause which cap 10% of total project cost i.e. $ 30 million if project delay more than 2 months.

Can the Company A claim full amount of LAD from the Contractor if the project delay more than 2 months and the default is clearly by Contractor?
Devamalya De
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Dear Norzul,

I believe the difference between the terms ‘actual’ and ‘potential’ is quite apparent. Actual is based on facts; potential based on projection. So where is the doubt? Potential profits is purely based on projection, the element of assumption is ingrained in the same. You may / may not achieve your potential profit. A just Court of Law will never uphold a claim if there is even an iota of doubt as to its certainty, its occurrence. And I know of no such method, by which it can be proved that a potential profit could have actually been reaped.
Norzul Ibrahim
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Dear All,

The discussion become more and more interesting...For the sake of our discussion below is the LAD clause in the contract:

1) If the CONTRACTOR fails to complete the design and the WORK by the date for completion or within any extended time and the OWNER certifies in writing that the CONTRACTOR shall pay or allow the OWNER a sum calculated at an amount of point one percent (0.1%) of the CONTRACT PRICE per day of delay as Liquidated Ascertained Damages, for the period during which the said design or WORK thereof
shall so remain and have remained incomplete and the OWNER may deduct such damages from any monies due to the CONTRACTOR.

2) The Liquidated Ascertained Damages stated in this Article is deemed to be the "actual loss" which the OWNER will suffer in the event that the CONTRACTOR fails to complete the WORK by the date for completion or within any extended time given to the CONTRACTOR.

3) The CONTRACTOR by entering into this CONTRACT agrees to pay to the OWNER the said amount(s) if the same becomes due without the need of the OWNER to prove actual damage or loss.

4) The CONTRACTOR’s aggregate liability for delay under this Article shall not exceed ten percent (10%) of the CONTRACT PRICE.

What people can argue is the definition or the scope of "actual loss". Does potential loss of profit part of actual loss? I believe yes it does.

Any comments?

Thanks

norzul
Devamalya De
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Dear Simon/Andrw/Norzul,

Express stating of loss of potential profit as a part of LAD in contract can never be agreed upon by a contractor (a sane one) and absence of any reference to the same in the Contract will automatically disqualify the Client from claiming any. Knowing that LAD is a genuine pre-estimate of damages, do you think any rational contractor would agree upon a loss, which is potential i.e., based up on projection, assumption etc? Losses considered in LAD, I believe, are only express losses [rent lost, interest during construction] which can be considered to have been actually suffered by the Client, beyond any reasonable doubt, if a certain facility is not rendered fit for handing over (Virtual Completion) within a certain agreed time span.
Norzul Ibrahim
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Dear Simon/Andrew,

Have yu guys experienced a real case dealing with LAD particularly with regards to "loss of potential profit". Actually in our organization now, there are 2 school of thoughts, one says it is a genuine claim, another says we will not get LAD based on loss of potential profit. We are in the process of strenthening the case. The project now under construction phase and we strongly forsee it will be delay 2-3 months. Total LAD (10%) amounting to about USD 12 million.

Thanks

NORZUL
Simon Peter Cordner
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I’ll echo Andrew. Loss of potential profit is a genuine concern, and should be dealt with in some fashion.

A lot will depend on the contractual language: how does it describe LDs and LADs? Generally the language references loss of opportunity, rent, or something similar.

Exclusion of a reference to lost opportunity/profit in the language represents enough of a loophole that you could attempt to expand any sought-after remuneration by including such lost opportunity/profit. The success of such an approach would be limited and would be discarded by the contractor in any attempts at litigation-avoiding negotiations anyway, but you could bring it up if you felt like annoying the contractor.

Ultimately, I doubt that you’d get any more than any limit set by the contract. The contractor entered into the agreement with an understanding of limited liability, and to attempt a post-tender ’gotcha’ that would expand that liability would certainly be frowned on by most courts.
Andrew Flowerdew
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Devamalya,

Wouldn’t totally agree with that statement
Devamalya De
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Norzul,

Potential profit can’t be considered as opportunity lost or consequential loss in LAD since the latter is instituted to limit the loss of one party (client) owing to delay caused by the other (contractor) and not so that the client profits. For the same reson there is a cap on the amount of LAD. A contractual clause has to be equitable and hence accpetable to both parties and can’t be one-sided.
Andrew Flowerdew
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Norzul,

Assuming the delay is due to the contractors default then the starting point is that the contractor is due to pay liquidated damages for the delay. The payment of LD’s will be the amount set out in the contract and paid in accordance with the contract. Therefore if it is capped at 10% of the contract value then under normal circumstances that cap will stand.

If the loss is now greater and the Employer is trying to find a way round the clause then he’s going to have a difficult time. Even when the LD clause is considered void for some reason the courts will usually still use the values in the contract as the limit on the contractors liability. The reasoning being that this was agreed at the time of making the contract as what the parties intended the contractors liability to be. No more, no less.
Norzul Ibrahim
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Andrew,

So in the case of Company A scenario, do yu agree that it has the right to exercise the LAD clause? At first I thought the "damage" only cover either a "direct physical damage or direct financial loss" e.g. demurrages, penalties, claims, damage of equipment,etc

Can we consider not getting the potential profit as opportunity loss or consequential loss? which I was originally thought not covered under LAD clause.

Thanks

Norzul
Andrew Flowerdew
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Norzul,

1. LD’s are supposed to be a genuine estimate of the damages (financial cost) that the Employer will incurr if the project is delayed - eg loss of profit, loss of rent, liabilities to other contractors, additional site supervision costs, etc, etc. There is no one solution as the situation will be different in every case.

2. If Employer has chosen to limit his LD’s then, all else being equal, tough, that was his choice and he has to stick by it.
Norzul Ibrahim
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Dear All,

Is there a universal accepted definition of "damages". Can I consider this as one of the damages:

Case1
Company A pays $ 120 million per year for its electricity and other utilities bill. In the pursuit to reduce the operating cost, it has planned to construct its own power plant which will enable to reduce the operating cost by $ 60 million per year. The cost of project is about $ 300 million. In the contract with the contractor it has included the LAD clause which cap 10% of total project cost i.e. $ 30 million if project delay more than 2 months.

Can the Company A claim full amount of LAD from the Contractor if the project delay more than 2 months and the default is clearly by Contractor?
Norzul Ibrahim
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Andrew,

Yu mentioned "By using properly calculated LD’s he does not have to prove anything, just deduct the LD amount. It therefore saves the Employer alot of work."

What do yu mean by properly calculated LD?

Thanks

norzul
Stuart Ness
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Andrew,

I agree. That was the point that I was trying to show - that the LADs are there for the Contractor’s protection as much as for anything else!! Sounds crazy to some, I know, but...

Cheers,

Stuart

www.rosmartin.com
Andrew Flowerdew
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Stuart,

Given the amount of arbitrations and court cases relating to LD’s and there application when there has been express provision in the contract then I think the Employer without the provision in the contract would have a huge problem in trying to establish and agree the proper amount of damages. Given the cost of litigation etc then on modest LD’s it would not be worth the Employer persuing them, in effect denying the Employer any damages for late completion.

The provision is there as much for the contractors benefit as it is the employers.
Stuart Ness
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I would underline Ronald’s comment; LADs are advantageous to the Contractor. If they were not limited (to say 10% of the Contract Price), then the Contractor could very well be faced with a claim for additional and very expensive time related costs and other loss and expense, all of which could be considerably greater than 10% of the Contract Price.

And Norzul, I have seen the LAD Clause applied many times!

Cheers,

Stuart

www.rosmartin.com
Andrew Flowerdew
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Ron,

Not sure if they were invented for the contractor, I would say they are an advatage to both contractor and employer -

For the contractor they certainly quantify his risk at tender stage.

The Employers advantage is that there is certainty (usually, but not always!!) in getting damages for an over run in time rather than the uncertainty of having to argue for them after the event.

Same as eot clauses, both parties gain some advatage from them.
Ronald Winter
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LDs are not a punishment. Actually, they were invented FOR the contractor to limit his or her risk. Without LDs, there is no limit as to how much a late project may cost the Contractor. No bonding company is willing to take on limitless risk.
Andrew Flowerdew
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Norzul,

I have also heard it quoted many times that large LD’s do no more than encourage the contractor to employ more quantity surveyors and claim consultants - they do not act as an incentive to get the job done quicker. This may or may not be true, but there are probably better ways to give the contractor incentives to complete on time.
Andrew Flowerdew
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Norzul,

LD’s are suposed to be a genuine pre estimate of costs the Employer would sustain if the contract was delayed by the contractors default.

The term LAD’s I believe came from the JCT contract - for some reason they chose to use this term instead of LD’s, but there is no difference.

When a project is delayed by the contractors default the Employer in the absence of LD’s can claim for general damages - but he has to prove that he has sustained these damages in order to recover them. By using properly calculated LD’s he does not have to prove anything, just deduct the LD amount. It therefore saves the Employer alot of work.

Knowing the potential liability at tender stage also gives the contractor something to price the risk of delay into his tender. Therefore in theory at least, everyone knew where they stood and arguments should be avoided later - this theory breaks down in practice though!!!!!

There is no reason why you can not cap or limit the total amount of LD’s to a value or % of the contract value if it is agreed between the parties. But if LD’s are time related, it seems strange that the Employers potential loss can have a limit on it. However, if the Employer is happy to limit his loss then it’s up to him.
Norzul Ibrahim
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I have problem with this LAD clause. It’s a normal practice in our corporation to include the 10% cap of LAD in any contract whether big or small project. However, was informed that it’s very rare we can exercise the clause. The burden to proof is on us not the contractor

So what’s the point of having the clause? Can it be a motivation factor for the contractor to complete the job on time?
Andrew Flowerdew
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Norzul,

They are for all useful purposes the same thing.
Norzul Ibrahim
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Dear Guys,

Liquidated damages are not allowed to be "penalties" under the current law. They would fail...

which country’s current law? US, UK, EU,...Malaysia?

Thanks

norzul
Geoffrey Boulton
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Just to add a little further.
Liquidated damages are not allowed to be "penalties" under the current law. They would fail.

The 10% cap is set because it is a handy number and because we would not want the Contractor building in infinite amounts of contingency for a "possible" event. Shared risk on the part of owners and all that good stuff.
Stuart Ness
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Norzul,
I think that you are right in the first place - the two terms are pretty much interchangeable.
Liquidated and Ascertained Damages and Liquidated Damages are both based on a (supposed) genuine pre-estimate of the extent of loss that an Owner will incur in the event that his project is finished late.
The use of the word ’ascertained’ simply underlines that the extent of damages has been calculated in advance rather than just guessed at!
You could argue, perhaps, that plain ’Liquidated Damages’ are not calculated thus, but the application of LD and LADs are the same. Often however, and irrespective of the fact that are supposed to be a genuine pre-estimate of likely loss, they are generally set at a maximum of 10% of the Contract Price.
In any case, since the LDs /LADs are clearly set out in the Contract terms, the Contractor has the opportunity to factor them in to his Contract Price if he considers it necessary.

Hope this helps

Stuart

www.rosmartin.com
Devamalya De
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There is a variation to what i said yesterday about Liquidated Ascertained Damages. As you must be aware that practice has grown up in the construction industry for the parties to try to estimate before the contract is entered into what damages the client may suffer if the contractor is responsible for delay in completion. The amount has to be a genuine pre-estimate of what loss might be suffered and so, in order to fix on the relevant sum, it is necessary to prepare a complete assessment of what losses may occur even in terms of loss of revenue because a facility is not opened or the cost of renting alternative accommodation elsewhere, for example. It is important that the LD / LAD are not set too high or the contractor’s price will go up substantially in order to take that risk into account.
Norzul Ibrahim
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TQ Deva..
Devamalya De
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I believe Liquidated Damages (LD)is the provision in the contract (more as a deterrant for delay) of charging the contractor a certain amount (per cent basis) as fines for delay based on the damages perceived to have been undergone by the client, subject to a maximum cap of upto 5 per cent (generally). It can also tantamount to revoking the Bank Guarantee of the Contractor, subject to mutual consent between the Client and the Contractor (which rarely happens!). When claiming Liquidated Damages, the onus is on the client to prove that he has actually undergone damages. Once he is able to prove the same and the same is accepted by a recognized (by both parties) Court of Law as just and reasonable, the damages claimed by the contractor is referred to as Liquidated Ascertained Damages (LAD) as the damages have been ascertained to have been actually undergone by the agrieved (client )and not a fictitious amount just for the heck of claiming.