LIQUIDATED AND ASCERTAIN DAMAGES

RJM, this is may be interesting as well, when contractor pleads that LADs are "penalty" in the contract it mean that he claims that a foul has been committed in the contract by the Client/Employer, therefore he requests for the Court to intervene so a particulary LAds clause sholud be declared invalid and unenforceable.
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Just to clarify few issues, if you go to the Standard Bidding Documents by PPRA which are in use by PEs, among listed documents forming part of the contractors/suppliers bid is General Conditions of Contract (GCC) and Special Consirtions of Contracts (SCC).

As far as LADs are concerned, Clause 52 of the GCC provides:

52.1 The Contractor shall pay liquidated damages to the Employer at the rate per day stated in the Special Conditions of Contract for each day that the Completion Date is later than the Intended Completion Date. The total amount of liquidated damages shall not exceed the amount defined in the Special Conditions of Contract. The Employer may deduct liquidated damages from payments due to the Contractor. Payment of liquidated damages shall not affect the Contractor’s liabilities.

52.2 If the Intended Completion Date is extended after liquidated damages have been paid, the Project Manager shall correct any overpayment of liquidated damages by the Contractor by adjusting the next payment certificate. The Contractor shall be paid interest on the overpayment, calculated from the date of payment to the date of repayment, at the rates specified in Sub-Clause 46.1.

52.3 If the Contractor has not corrected a defects within the time specified in the Employer’s notice, the Employer will assess the cost of having the defect corrected, the Contractor will pay this amount, and a penalty for lack of performance calculated as described in Clause 38.

If you go to the corresponding clauses of the SCC (clause 23), you may see that the Employer is left to insert the calculated LADs based on ceiling provided for in the Regulations ie 0.1 and 0.15 percent of contract price per day and the the maximum of which should be equivalent to the amount of the performance security.

Performance Security:

Clause 55.1 of the GCC provides:

" 1. The Performance Security shall be provided to the Employer no later than the date specified in the Letter of Acceptance and shall be issued in an amount and form and by a bank or surety acceptable to the Employer, and denominated in the types and proportions of the currencies in which the Contract Price is payable.

2. The Performance Security shall be valid until a date 28 days from the date of issue of the Certificate of Completion in the case of a Bank Guarantee, and until one year from the date of issue of the Completion Certificate in the case of a Performance Bond.

Performance Security is required to be a minimum amount equivalent to 10 to 15 percent of the contract price (Clause 26 of SCC read with Reg .

Regulation 88(7) od the GN NO. 97/2005 provides that the tender security of the successful tenderer shall be discharged when the tenderer has signed the contract and furnished the required performance security to the satisfaction of the procuring entity.

Persuant to Regulation 123(5), performace Security operates as a remedy to protect the PE in the event that a service provider or contractor fails to provide services at the required standard, to remedy faults or to complete the works to the satisfaction of the procuring entity, that procuring entity may either. In that situation a PE can eiher, withhold payment of any moneys retained, call any performance security if such has been furnished by the service provider or contractor.


Calculation of the Liquidated damages

In its context, LADs are based on "genuine pre-estimated loss" recorded in the contract to be paid by the contractor/supplier or service provider for each day, week or other period which the completion is delayed. The amount may be held by the Court to be penalty if they do not represent or reflect the likely financial loss or costs incurred by the Employer/Client. In a situation, the employer can end up recovering the actual loss suffered for the breach of contract under the common law.
The law requires that LADs to be inserted in the contracts, for a particular item of work should be related to the expected loss of profit of such work for each day that the Employer is deprived of it possesion/ use due to the delay by the contractor. However, in calculating the damages, the Court always do not consider accurateness of the figures as intended profit in the pre- assesment. It can be indirect loss eg loss of amenity for use/enjoyment which may be differently from commercial profit based on actual income.

The court also may refuse to enforce the clause for LADs and held it to be punitive if the fixed rate of LADs is higher than the actual value of construction the work itself. eg LADS of Tshs. 1, 000, 000 for a delay of completing a water reservoir whose construction value is Tshs. 100,000, can not in any way be held as reasonable loss, therefore is a penalty.

On the other scenerio, the Employer/ Client will be deprived to claim for the LADS of the full value of contracted works if at all the contract involves sectional completion and the Employer has requested the contractor/service provider for a partial possesion of a sectional completed work.
(eg see Clause 2.2 of the standard GCC which provides: If sectional completion is specified in the Special Conditions of Contract, references in the Conditions of Contract to the Works, the Completion Date, and the Intended Completion Date apply to any Section of the Works (other than references to the Completion Date and Intended Completion Date for the whole of the Works).

Courts' interpretation of LADs Clause

In that case it was noted that a clause is penal if it provides for “a payment of money stipulated as in terrorem of the offending party”, (i.e. a payment of a sum of money intended to frighten or intimidate the offending party). A clause that is found to be penal (i.e. a penalty clause) is generally invalid, and it is an unusual feature of the law of contract that the court will strike down penalty clauses, whilst (usually) permitting other clauses which have been freely agreed between the parties even if those clause are unduly harsh.

In another case of case of Imperial Tobacco Co. v Parslay [l936] 2 All ER 5l5, it was observed that the unequal financial posi tion of the parties is irrelevant as is any question of disproportion between the amount of the contract sum and the agreed sum payable on breach. There is a presumption that it is a penalty when a single lump sum is payable by way of compensation on the occurrence of one or more or all of several events some of which may occasion serious and others but trifling damage (Laird Brothers v City of Dublin Steam Packet Company (l990) 34 ILTR 9) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of breach are such as to make precise pre-estimation almost an impossibility.

in the case of Campbell Discount Co Ltd v Bridge [1962] AC 600, the House of Lords struck down as a penalty a clause in a hire purchase agreement requiring the hirer to pay compensation for premature termination. The objectionable feature of this clause was that it provided a sliding scale which operated in the wrong direction. The less the depreciation of the vehicle, the greater was the compensation payable.


In the other case of Alfred McAlpine Capital Projects Limited v Tilebox Limited, was that on 27 April 2001, Tilebox and McAlpine entered into a written building contract. Clause 24 of the contract conditions provided that McAlpine should pay liquidated and ascertained damages for delay at the rate at the rate of £45,000 per week or part thereof. The Contract Completion Date was 14 August 2002, but building works were not completed by that date, and the works were not expected to be complete until June 2005 (i.e. some 2½ years late).

Against this background, McAlpine became concerned about its potential liability (of something approaching £6 Million) to liquidated and ascertained damages under clause 24 of the contract conditions. McAlpine took legal advice and, having done so, formed the view that the rate of liquidated and ascertained damages specified in the building contract was excessive, and was a penalty clause and was therefore invalid. Tilebox denied that clause 24.2 was a penalty clause.

The parties referred this matter to court, and in the court and the Court, considered the authorities and made the following general observation:-

(i) That a pre-estimate of damages does not have to be right in order to be reasonable. There must be a substantial discrepancy between the level of damages stipulated in the contract and the level of damages which is likely to be suffered before it can be said that the agreed pre-estimate is unreasonable.
(ii) Although many authorities use or echo the phrase "genuine pre-estimate", the test does not turn upon the genuineness or honesty of the party or parties who made the pre-estimate. The test is primarily an objective one, even though the court has some regard to the thought processes of the parties at the time of contracting.

(iii) Because the rule about penalties is an anomaly within the law of contract, the courts are predisposed, where possible, to uphold contractual terms which fix the level of damages for breach. This predisposition is even stronger in the case of commercial contracts freely entered into between parties of comparable bargaining power.

Based upon the above, the Court formed the view that the LADs in question was not a penalty clause, and therefore would be enforced.

Conclusion
For the LADs clause to be regarded as penalty in the contrary will depaend upon a case to case basis. However, the Courts are always smart not to interfere with the freedom of the parties to enter into contract. Therefore, if there the contractor/service provided had agreed on the clauses by signing the same, the court may uphold contractual terms in the same ways as agreed between the parties.

In the circumstances, the basis of challenging the clause can be considered during negotiation of the agreement before signing.

Thanks RSM

I do appreciate to find this forum for exchanging various ideas and views on procurement and contracts management.

Just in case, for the interested members in the construction industry, there are a lot useful materials online relating to the isssues in our discussion.

You may wish to visist the following links.

http://www.contractjournal.com/Home/
http://www.scl.org.uk/
http://www.constructionarbitrators.org/publications.htm
http://www.bre.co.uk/
http://www.construction-on-line.co.uk/

Geve,

Welcome to the forum and let me start by quoting you

I read this confusion on the issue of retention money and Liquidated damages.

We are happy that you have joined the forum. There is no confusion, we want people to discuss and air their views and the wish is to have people like you coming in and discussing with references and facts. This way we can make the forum a resource for procurement experts and others interested in the subject matter.

We look forward for more of your contibutions. The two that I have read so far, this one and that on PPAA rulings tells us that we have a serious entrant in the forum. What do other forum members think?

I read this confusion on the issue of retention money and Liquidated damages. Just from some of us how may be not clear on the two, it is not for the purposes of law to provide for the right of the parties in the contract (any of). But it is for the parties themselves to agree o what they want the law to protect them in case of any dispute.

Retention money/ Fund is the amount of money which the employer/client can insert and agree with contractor in the construction of contract to be deducted from payment due to the contract for the purposes of protecting the employer in case that the works are not well completed inaccoradnce with the contract. Therefore, retention can be used to rectify the defect without prejudice to the other remedies which the employer may opt if things goes wrong in the oroject contrary to the expection. Retention money as the word sounds, can be deducted from IPCs and retained up to the date of issuance of Practical/substantial completion certificate whereby the half moiety has to be refunded to the contractor and the rest to be refunded upon issuance of completion/final certificate. Retention is only the employers maoney when the defects on the works occurs and the contractors fails to remedy the same hence to make the employer use the money. Otherwise, they will remain to be Contractor's monies.

LADs.

Most of the Standard Construction contracts provide for express terms and conditions as obligation of both the Employer and the Contractor therein. In and case such terms are not expresses provided, they will be deemed to be implied applicable in the said contracts under the common law in order to protect the rights and ensure the obligations of each party to the contracts is well performed. For example among the obligations which the contractor has in the construction contract included:
(i) an obligation to complete work by certain completion date or specified period;
(ii) an obligation to progress the work regularly and diligently; and


While on the other hand the employer has an obligation generally to facilitate the work of the contractor including:
(i) to appoint the contracts administration team as earlier as possible
(ii) to paid the contractor in accordance with the agreed contract price or such sum as due to adjustment of contract price,
(iii) to provide required information or materials to the contractor to enable him execute the work properly; and
(iv) not to interfere with the progress of work by the contract.

With an obligation to execute and complete the work according to the agreed completion date, the Contract may be liable to the Employer for the breach of the contract if fails comply with the contract period. Breach of contract by failure to comply with completion date, may entitle the contractor to pay both liquidated and unliquidated damages.

Liquidated damages are intended to be a genuine pre-estimate of the Employer’s losses in the event
of delay. As opposed to the general damaged for which the employer can be entiled to prove actual loss, LADs can be claimed even without any need to proof any loss .

Where the contract provides for LADs in the sum of X Tzs to be payable for each week of delay, and the contractor fails to complete on time, the Employer is prima facie liable to claim for liquidated damages without further enquiry. In fact an Employer is entitled to claim liquidated damages even if he has suffered no actual loss (Clydebank Engineering and Shipbuilding Company v Castaneda [l905] AC 6)

For the employer to have a right to claim for LADs, the following conditions must apply:
(i) there must be an express provision in the contract giving the employer a right to LADs in case the completion date of the project is set behind the intended/ agreed date for compleate;
(ii) there completion date must be delayed by the contractor's risk events/faults;
(iii) There should be a mechanism to ascertain damages payable set in prior and be respond to the relevant portion of work alleged to have been delayed (certanity as to the amount and dates to be calculated and paid).


It should be noted that the employer may not have a right to claim for the LADs where completion has been interfered by factors which are not within the control of the Contractor (such can be considered as as Employers acts or omissions or events which are not in the control of either of the parties such as increment averse weather etc, construction contracts allow for the contract administration or Architect to extended completion date beyond).

The LADs provisons can sometimes go with extension of time provisions in the contract to allow the Employer through Archutect or Engineer, to extend time inevent of delay of completion for which the contractor is responsible. Otherwise, if the contract contains no EOT provision or is unclear on powers of the Employer to extend time, then at common law, time is said to be set as large and the employer can not claim for LADs. In such situation, the Employer can only have a right to claim for general damages which can be proved.

Extension of Time:

EOT is one of the admistrative powers of the Architect or Engineer under the Construction contract to allow for more time to the contractor so as he can complete the works at further agreed date beyong the initial intended completin date. In one case of Rapid Building Group Limited v Ealing Family Housing Association (1984) 29 BLR 5, it was considered that the purposes of EOT provision in the contract are:
(i) to relieve the contractor of liability for paying damages (LADS) to the Employer for any period prior to EOT; and
(ii) to enable the employer to maintain a proper date from which LADs can be calculate in the event the employer has presvented the contractor from completing the works.

In the other case of Peak Construction (Liverpool) Ltd vs McKinney Foundation Ltd (1970) 1 BLR, the court was of the views that the LAD and EOT clauses in printed forms of contract must be construed strictly contra proferentem. In this case, it was considered that if the contractor fails to complete the works on time by the wholly or party fault due the employer, then the EOT clause should provide, expressly or by necessary inference, for an extension on account of such a fault or breach on the part of the employer, otherwise time would be “at large” and the employer will loss right to LADs.

Therefore, clear provisions in the contract are required for dealing with the Retention monies, LADs and even EOT.

Contractors defence

The Contractors can have a valid defence against the Employers' right to LADs as follows:
(i) The agreed sum is a penalty (The court must find out whether the payment stipulated is in truth a penalty or liquidated damages, irrespective of the words used by the parties. LADs which are not genuine pre-estimate of damage can not apply)
(ii) The contractual provisions do not work (eg in a situation where a single sum is stipulated for liquidated damages but the works are to be completed in sections at different times or where the employer takes possession of part of the works before completion of the whole).
(iii) The delay was caused by the employer (eg ordering variations which will delay completion, failing to give possession of the site, delaying in giving necessary instructions.

RJM and Kurare,

I am afraid I came in late in this discussion, but I have one question that I need to put forward. Why do they put a limit in the amount of liquidated damages? A typical clause on delay damages ends like this ..... However, the total amount under this clause shall not exceed the maximum amount od delay damages (if any) stated in the SCC

My view is that at a certain point, extended delays shall be construed that the contractor has abondoned the works or has plainly demonstrated the intention not to continue performance of his obligations under the contract, and therefore give the Client the right to terminate the contract.

What do you say

We are PE dealing with the contract for civil works using Standard Bidding Document for Smaller Works issued by PPRA wherein the time for completion was set at 12 months. The Contractor had a time overrun of 18 months and after deductions of unworkable day and delays caused by late approval of construction drawings the delay would still run to the maximum of 10% of delay damages foreseen in the contract. We propose to inform the contractor that not only he is to pay for these delay damages amounting to 10% of the Contract but also that we propose to withhold the payment of the retention money to pay for the delay damages. The performance guarantee was extended two times but in the end the Contractor did not extend his performance guarantee, so I am afraid that we cannot draw this guarantee.

My question: do we have a legal basis to withhold retention money as payment for delay penalties? I'm afraid that your answer will be no, but can we hope for entering in discussions with the contractor to come to some kind of agreement on this. Say negotiating into using this retention money as payment; or at least a part of it?
Or should SBD for Smaller Works be interpreted as such that retention money is only destined for non compliance of the contractor regarding the quality of the work?