Liquidated damages – What’s the deal?
A member has recently written in to ‘What could possibly go wrong?’ asking about liquidated damages, justice and retribution.
Dear What Could,
We’ve just about finished a really great house for some very nice clients and we’ve both had to put up with a very difficult, very rude builder, who thinks he can get away with anything. The project is now over 3 months late and I would like to see the builder penalised and the client compensated for their stress and anguish. The client wants to claim liquidated damages. When I told the builder this they said this wouldn’t be fair because there hasn’t been any actual financial loss because of the delays. Would the client have to demonstrate actual financial loss to claim damages?
DEAR ARCHITEAM MEMBER,
There is a lot going on here, mostly under the heading of ‘contract administration’, it’s a big topic. The contract is your stock in trade, make sure you understand it, know and love it to the point where you can quote it verbatim. Should you sleep with it under your pillow? Yes. I’ve seen very experienced architects with the contract noted with tabs and highlighted passages especially for the trigger / time clauses. When asked about this they said they had a duty to the client to know what they are doing to protect the client’s interest (as well as their own) in administering the contract to be fair to all parties. Hard to argue with this.
TALK THROUGH THE PROS AND CONS.
It’s important to remember that ‘administering the contract’ is not just about bits that you like but the whole contract. You are not empowered to change the terms of the contract. If you don’t act appropriately, including liquidated damages, you could be subject to a claim by a party who has suffered loss by your action / inaction. It is the owner’s decision as to whether or not to enact liquidated damages, not the architect’s decision. The architect is required to notify the owner that it is their option to do so, but it is up to them to make the decision.
LIQUIDATED DAMAGES, THE LAW IS PRETTY CLEAR
It’s not about justice or retribution or a penalty, in fact they are specifically excluded and would void the damages if enacted. Liquidated damages are solely about compensation for a breach of the contract for late completion. The amount must be a genuine reflection of the loss that would be suffered by late completion. This must be estimated when the contracts are prepared and if there is no actual damage when there is a breach liquidated damages are still payable. To make sure the damages estimated are genuine, keep notes of the process and your assessment of how you calculated damages. If your client is going to rent while the building works are being undertaken, the likely rental costs for your client may be an appropriate amount. Make sure all tenderers are aware of the contract condition.
CONTRACT ADMINISTRATION – IF IT’S NOT YOUR THING DON’T DO IT
Contract administration can be tough and it’s not for everyone especially when you have a very difficult and very rude builder. If it’s not your thing don’t do it, it will stress you out and you may finish up with a claim on your hands. If you want to push on with it your first port of call is your judgment in assessing possible tenderers. Be more circumspect in the future; don’t want to dance with the devil again.
FINALLY AND IMPORTANTLY
This is not legal advice; you must always seek your own independent advice in all these matters prior to preparing contracts.
Peter Finn, architect