Can there be liquidated damages in a sub-contract?
The straight answer to that question is that there can be provision for liquidated damages in a sub-contract, but it is not usually a very good idea. There is a great deal of case law concerning liquidated damages stretching back many years. For example, a leading case is Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd. These cases deal with attempts to impose liquidated damages in all kinds of circumstances. What is clear is that the purpose of liquidated damages is to avoid the need for parties to become involved in expensive litigation in order to establish a breach of contract, prove the damage resulting from that breach and then quantify the cost of rectifying the damage. Instead, the parties agree on a sum of money which is to be deducted on the occurrence of an event. Then all that need be done is to identify that the event has occurred and to allocate the sum of money. In building contracts, liquidated damages are almost invariably connected to a failure by the contractor to complete the Works by the completion date in the contract. Liquidated damages are usually stated as £x for every day or week that the Works are delayed. Before the liquidated damages can lawfully be deducted, it must be shown that the contractor was not entitled to any extension of the contract period. The periods of time between contract completion date and actual (practical) completion are matters of fact.
A key factor in dealing with liquidated damages is that the sum of money must be a genuine pre-estimate of the loss likely to be suffered by the employer if delays occur. A genuine pre-estimate does not mean that the sum has to be calculated with great precision. Sometimes precision can be used and, where it can, it should. However, in most cases, the employer may only have a vague idea, at the execution of the contract, of the sum likely to be lost. In general terms, provided a genuine effort has been made no matter how guessed the outcome, the damages will be enforced by the courts. In calculating the sum, the employer has to think of only one thing – the consequences if the contractor does not finish on time. Failure to finish will be instantly clear.
Contrast that situation with a sub-contractor. A sub-contractor is one of several, perhaps many, on the site. A sub-contractor has its own timescale in which to work, in and amongst other sub-contractors on the site. It is often necessary for a sub-contractor to go away and then return to site when needed. Therefore, when looking at the programme encompassing all the work to be done on a project, all the sub-contractors are closely linked and due to complete their sections of the Works at different times. If a sub-contractor is delayed due to its own fault, the delay will affect some, but probably not all of the other sub-contractors. A sub-contractor in delay can do little to recover lost time, because the delay will affect others and even if the delaying sub-contractor returns to site later and finishes that piece of work in half the time, it is unlikely to have a major or any effect on the Works as a whole. The chances are that the main contractor will also cause some delays which will obviously affect the sub-contractors. It is impossible for the main contractor to calculate a suitable sum for each sub-contractor to represent a genuine preestimate of the loss likely to be sustained by the main contractor if any or all of these sub-contractors fail, through their own fault, to meet their individual completion dates. Even if it was known that just one of the sub-contractors would fail to meet its completion date, the calculation of resulting loss to the main contractor would be difficult to do after the event, but certainly not possible before. Therefore, the sub-contractor should be able to successfully challenge the whole basis and amount of liquidated damages. Where several sub-contractors are in delay, the problem is magnified. Main contractors have been known to insert, as the liquidated damages for each sub-contractor, the amount of liquidated damages which the main contractor is liable to pay under the main contract. It takes but a moment’s thought to see that such an approach is completely untenable.
It is no coincidence that all the standard form sub-contracts which have been produced provide for unliquidated damages only. In other words, they all acknowledge that the main contractor will have to prove that a sub-contractor was late through its fault and the amount of damages suffered thereby.