When it comes to LADs, don’t just assume you’ll be able to challenge contracts at a later date if you need to.
“LADs”, the acronym for Liquidated and Ascertained Damages, is one of the most familiar to any participant in the construction industry, but there is also an old saying that familiarity breeds contempt.
Get yourself up to speed with the term and check that your familiarity with the expression is not leading you into any false assumptions…
The amount stated for Liquidated and Ascertained Damages in a contract must be a “genuine pre-estimate of loss”. Broken down, this means:
- “Genuine” – that there must be some science, logic and relationship with reality behind the calculation of that amount.
- “Pre-estimate” – that the estimate which is based on that “genuine” approach must be arrived at before the contract is entered into; as long as the process meets the “genuine” test, the amount does not have to be precise – it can end up having been much higher or much lower than the actual loss.
- “Loss” – legally recoverable losses that can actually be suffered.
In this context, “Liquidated” simply means the conversion of an otherwise unquantified entitlement into a fixed amount. Once the contractual trigger is activated, that fixed amount is recoverable in compliance with the relevant provisions of the contract in question without any obligation to prove the amount of loss.
Typically, under a building contract, the losses covered by LADs are those caused by delay. Where that is the case – unless excluded by very clear words in the contract – all other non-delay losses are recoverable as general damages.
If you are pulling together a JCT contract where no LADs are applicable, don’t write “Nil” or “Zero” in the appropriate box in the Contract Particulars. The courts have decided that means LADs have been set at “Nil” or “Zero” and delay damages cannot be recovered at all under that contract.
If the commercial context of a project changes over time following the contractual completion date, take care to identify whether that requires a staged recovery of LADs in differing amounts. The provisions around recovery of LADs need to be clear, certain and consistent.
And finally, if you enter into a contract which contains a provision in which you are said to “acknowledge and/or undertake”, or similar wording, that the amount of the LADs recoverable under that contract are agreed, don’t just assume you’ll be able to challenge that at a later date if you need to. Ask for an explanation of the basis for the “genuine pre-estimate of loss” so that you can make sure.
As ever, if any of the above issues strike a chord, please take the time to manage and mitigate your risk by taking expert legal advice based on the detailed facts and relevant contractual provisions which govern your contract. Please get in touch with me directly on David.firstname.lastname@example.org.