Reed Smith Client Alerts

Does termination of a contract before the works are complete impact an employer’s ability to recover liquidated damages? This question was recently considered by the English Court of Appeal. The answer? It depends on the terms of the contract. However, it seems that many liquidated damages provisions, including those in currently used standard form construction contracts, may not apply at all on termination of the contract, leaving employers to prove a claim for general damages for delays suffered both before and after termination. This means that the parties should carefully consider LD provisions before entering into or terminating a contract.

Authors: Shareena Edmonds Elinor Crowther Martina Antosova

Background

While liquidated damages provisions (LD provisions) and termination rights are fairly standard and familiar components of construction contracts, very few contracts expressly address how these provisions might operate together (although this appears to be changing with the 2017 edition of FIDIC – see further below).   

However, there are occasions where a construction project is in difficulty, the employer becomes entitled to terminate the contract, and the contractor is already in delay before termination occurs. In those circumstances, what happens to the LD provisions on termination? Do they survive termination and, if so, to what extent do they remain applicable?