A liquidated damages (LD) clause is common in many building contracts for commercial or institutional buildings, but less common in residential contracts. Liquidated damages are an amount which the builder agrees to pay to the homeowner for late completion of the project. This is usually an amount per day or per week.
Liquidated damages are based on a genuine pre-estimate of damage likely to be suffered by the building owner in the event of late completion. This must be a pre-estimate when the contract was entered into.
For example, an amount of $350 per week might be included as a genuine pre-estimate of likely loss as at the date of contract signing. This loss to the building owner could include additional interest paid on borrowed funds and additional rent paid for alternative accommodation.
If the amount of the liquidated damages to be imposed is in excess of the maximum amount conceivable, that is, it is out of proportion to the damage actually suffered, the LD clause may be deemed to be a penalty and be unenforceable. However, if the estimate was a genuine one but turns out to be inaccurate, favouring one party over the other, it nevertheless is likely to stand.
Building owners should also be mindful that even if there are contract time overruns, LDs may not be payable if the builder claims extensions of time to the construction period. A builder is generally entitled to claim a time extension for factors outside its control and/or which could not be reasonably foreseen at the time of contract signing. Again, the exact terms of the contract will be important in determining such claims.