LIQUIDATED DAMAGES

• Most large contracts contain this provision

• This provision explicitly states that for each calendar day the
work remains uncompleted after the final completion date
stated in the contract, the contractor shall pay a certain amount
to the owner
• Sometimes a series of amount are stated for separate parts of
contract work called Milestone completion dates - in addition
to final completion date
• These specified payments are intended as reimbursement for
owner’s monetary loss due to delay
• They are called liquidated damages because they are stated as
fixed rupee amounts per day
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• Conceptual basis of liquidated damages

– In many cases, the actual damages that owner will suffer in
event of late completion is difficult to determine
– The owner & Contractor agree on a fixed daily rupee
amount that is considered reasonable measure of the extent
of damage in the event of late completion
– In public sector and in much private work, determination of
rupee amount-unilaterally made by owner-bid
advertisement on a “take-it-or-leave-it” basis
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• Liquidated damages provisions are a contract remedy

– Unexcused failure of contractor to meet specified date is a
breach of contract
– If liquidated damages provision is not present and if
contractor failed to pay money, owners recourse would be
to withhold money or sue, prove the extent of damages and
obtain judgment compelling the contractor to pay
– Liquidated damages provision relieves the owner from
above burden
– Their effect is to substitute a contract remedy for a common
law breach remedy
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• Liquidated damages are not a penalty

– Both parties to contract must realize that liquidated
damages are a contractually specified remedy to make
owner whole in event of late completion
– Liquidated damages cannot be properly assessed as a
penalty to punish contractor for any displeasing act or,
when not properly due, as pressure to coerce the contractor
into action favorable to owner
– In case of disputed liquidated damages assessments, courts
will not support purely punitive or coercive actions on
owner’s part
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• Judicial attitude towards liquidated damages provisions

– Current Judicial attitude toward liquidated damages is to
enforce such provisions in event of unexcused delay
– For every unexcused day of late completion, owner is
generally due the liquidated amount stated in contract
– Courts usually overturn liquidated damages if daily amount
stated in contract is not reasonable
– Standard of reasonableness is based on whether daily
amount is reasonable estimate, in light of level of
knowledge possessed by owner & contractor when contract
was signed
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• Bonus/Penalty clauses
– Liquidated damages provisions can’t be applied in reverse
if contractor finishes early
– There need not be benefits from every day’s early
completion because owner may not have planned to occupy
in the event of early delivery or due to other reasons as well
– Occasionally bonus/penalty clause provides monetary
benefit for early completion
– Daily rate for early completion is usually less than the rate
for late completion
– Bonus/Penalty clauses - more commonly found in private
sector contracts