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Liquidated Damages

In construction contracts the payment of liquidated damages is a benefit to the parties. Depending on the circumstances it can benefit the developer by relieving it of the obligation to prove a loss, whereas it can generally benefit the contractor in relieving it from the necessity to resist a [valid] claim and also introduces certainty as to consequences of the contractor’s default. Both parties can avoid expensive disputes in the courts with consequent delay for the project.

However, it is not a carte blanche for the contractor to neglect its obligations in terms of time, say.

In Bath and North East Somerset District Council -v- Mowlem Plc [2004] CA, Mowlem refused to follow an architect’s instruction. The developer council advised Mowlem that if it persisted in its refusal the council would engage another contractor to do the work. Mowlem again refused to do the work and the council instructed another contractor on the matter whereupon Mowlem refused to allow the replacement contractor on the site to do the work.

The council applied for an injunction to effect entry for the replacement contractor. Mowlem, in resisting the application, claimed that the only loss accruing to the council was a loss of time and that was capable of being remedied under the terms of the contract, which fixed liquidated damages for the delay.

The court disagreed and stated:

Mowlem is not entitled to breach its contract. The agreement on liquidated and ascertained damages is not an agreed price to permit Mowlem to do so, and it does not preclude the court granting any other relief that may be appropriate. In my view, the Council’s case is right in principle.”

There was evidence to show that the council’s loss would exceed the liquidated damages and the court affirmed the injunction granted in first instance to the council.