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Liquidity Damage (LD)

10 replies [Last post]
Jithin Kambhikanam
User offline. Last seen 11 weeks 5 days ago. Offline

Hi Everyone,

I would like to learn about LD. In one of the contract we have it is written as,

Liquidity Damage will start after 15th Sep if the project is not complete . " The production would be only started upon completion of the project" which gives the Client the Cash Inflow.

The project was not completed by 15 Sep but the end product of " Oil and Gas " as per the client requirement was obtained and the production was not stopped. So should the contractor pay the LD for being late even tough the clent started production.

 

So is the Clinet eligible to ask for LD or Contractor able to say no to Client for LD issued by client.

 

Thanks

Jithin

 

 

Replies

Steffen Ebber
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That’s a solid breakdown of how liquidated damages (LDs) work. In many places, they're really about estimating upfront the financial hit the employer takes if a project runs late, which seems only fair. But it’s interesting that in some spots, you can argue them down if they're not lining up with the actual losses, especially when things like falling oil prices throw a wrench into the usual loss estimates. In places where you can’t budge on LDs, knowing that upfront saves a lot of headache. And in India, you're right about being able to negotiate according to the India Contract Act, but definitely double-check the latest on that. It’s also a good point about the employer causing delays—if they're at fault, they really can’t turn around and dock you for the project being late. Switching gears, considering the volatility in energy markets, have you looked into renewable energy options like solar to potentially stabilize or reduce operational costs? How do you see integrating solar power impacting long-term financial planning for large projects?
Kannan CP
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1. In UAE, Normally the Client can take a maximum of 10% LD/Penalty as per the Contract.

2.If the works are not completed in full for the intended purpose as of Contract Completion date, the Client will issue the list of minimum items to be completed in order to commence his intended purpose. A time frame will be fixed. This depends on the negotiation between the contractor and client. Some clients will start issuing the penalty from the day 1 onwards after the contract completion.

3. In some situations the client will say that the contractor couldnt finish on time and if the contractor can finish the balance works with 1 month time, they can issue the taking over certificate dated as of original contract completion. This depends on the clients prioritization of that project.

4. The rest of the minor works which will not affect the intended purpose can be completed during the defects liability period (normally 1 year from substantial completion)

 

Kannan

Rafael Davila
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Almost 100% of contracts have some LD's this is kind of standard.  Also after the LD applies there is a clause that states for how long this will be allowed to go on before automatic termination and this is my question.  Is there such clause or the contract allows for abusive behavior like never allowing a 100% and holding indefinitivelly the contractor retainage and forever billing the LD's.  When no such clause is on the contract, unscrupulous clients will take advantage, they will look for any excuse not to grant 100% and make money at the expense of this. At home such a contract that allow for a never endig contract as determined by one side only would be called "leonine contract" and the LD clause might be declared invalid.

Jithin Kambhikanam
User offline. Last seen 11 weeks 5 days ago. Offline

Thanks Rafael,

In contract it doesnt say anything about " If Client can do the production without 100% completion". So probably it would be clients decision.

The contract has a clear statement saying that if the Contractor cannot achive 100% by the date then the LD charge applies. 

 

Thanks

Jithin

Rafael Davila
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From the reference I provided:

"If the provision seeks to do anything other than provide reasonable compensation, then the clause is really a penalty and, as such, will not be enforced."

If you can prove it is unreasonable you have a valid claim.

If they are producing whatever the job was intended then there already happened a substantial completion no matter if they signed or not a substantial completion document on toilet tissue paper or something better.

At some point it should be stopped so I ask, what the contract says about what happens after substantial completion?, how much time is allowed for client and contractor to close the job 100%?

Usually it is about a couple of months after substantial completion, not decades, if there is no agreement among the parties then then value of completing/fixing whatever is still to be finished is estimated, the contract price adjusted and the job is closed. If contractor decides not to place a claim in court it is all over, if he decides to place a claim against the adjustment then a court will finally decide. 

I suggest you get a lawyer.

Jithin Kambhikanam
User offline. Last seen 11 weeks 5 days ago. Offline

Thanks Rafael,

In one our project the deadline finished but the project was not 100% complete. say 90 % complete but the client started producing whatever they require with the 90% completion and is asking to pay the delay amount from the day after the deadline date as per the contract ( Example 1000$ per Day). (Which means Client is getting the revenu but is charging for the total delay amount as per contract / Day)

So i was thinking that as the Client is producting what they want to with whatever has been build so do we need to pay 1000$ of penalty amount per day or request the client to reduce it to 500$ as they are already getting what they want to.

Is it legaly ok or its upto the Client to decide. 

Rafael Davila
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Usually the allowed time to 100% completion after substantial completion is established on the contract. If for some reason there is no agreement on pending items within the alloted time then a procedure is established under the contract as to close the project.

This protects all parties, just imagine for 500$ disagreement keeping on hold forever a 500K$ retainage.

Jithin Kambhikanam
User offline. Last seen 11 weeks 5 days ago. Offline

Thanks Mike and Rafael,

You both gave me a good insight. I work in UAE Mike.

We have the same situation as per as per the link you gave Rafael. I have cut and posted it below'

" By way of illustration, on a construction project an owner may want $1,000 per day in liquidated damages to compensate the owner for lost rent and extended project administration for each day the work is not complete. However, once the project is substantially completed, the owner can rent the property, so that portion of the owner’s damages included within the stipulated $1,000 per day is no longer being incurred. If the owner seeks the entire liquidated damages amount for days after substantial completion until final completion, a strong argument can be made that no post-substantial completion liquidated damages are allowed even if the owner is incurring continued administration costs. The better liquidated damages clause would state that upon substantial completion, the liquidated damages will be reduced to $500 per day or some other reasonable figure to compensate the owner for the extended project administration required to obtain final completion of the project. "

 

Rafael Davila
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It is about the law and interpretations as well as about the contract terms. I suggest to look on the contract documents.

http://www.roofingcontractor.com/articles/87988-legally-speaking-liquida...

Mike Testro
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Hi Jithin

Liquidated damages are meant to be a genuine pre estimate of the loss the Employer will suffer if the project is delivered late.

In some jurisdictions the LD's can be reduced if they do not represent the actual loss suffered.

Production of Oil and Gas would be a large part of that loss but not necessarily all of it - so you may have an argument about what loss was actually suffered.

The fall in the price of oil should be brought into the calculation.

In other Jurisdictions the LD's are non negotianle - so you need to check what applies in your location.

If you are in India then as far as I recall LD's are negotiabe in accordance with the India Contract Act 1872. (but please check this)

Furthermore if the Employer caused any delay then he cannot reduce LD's for that period. If the Employer has caused a delay but not awarded an EoT then he cannot deduct any LD's because he has set Time at Large.

Best regards

Mike Testro