Roythornes Banner Image


News and Events

Liquidated damages for performance shortfalls in Engineering and Construction projects

View profile for Derryn Rolfe
  • Posted
  • Author

Engineering and construction project success is based on three factors: time; cost; and quality – the classic project management triangle.

One of the most important decisions companies starting work on their new or refurbished facilities have to make at the outset is where their project sits in that triangle, and that decision can only be based on their business’ drivers. It may be that having the retail facility up and running for the pre-Christmas trade is so critical that they are prepared to bear additional cost to meet the date, or it may be that a pension fund investor has to meet the strict limitations on borrowing and so must accept a lower spec.  Whatever the business decision, the contract is then drafted to reflect that.

For some projects, however, the focus in on quality, and nowhere is this more important than the processing and manufacturing industries.

If your new or expanded facility is making a product, whether it’s widgets or wine, it is fundamental that it produces the right number of units per hour at the right specification with no more than the stipulated emissions/scrappages/energy consumption. If it doesn’t, then your business is going to be damaged. If the failure to meet the specification is due to a design or workmanship error on the part of the contractor then damages are payable on a restitutionary basis.

There is, however, a big difference between damages being payable and damages being actually paid, and, by the time the cost of taking a claim to court and the lost management time (and energy) in dealing with the dispute have been factored in, you might decide that taking legal action is uneconomic.

But what if you can just deduct damages for failure to perform in the same way as you can deduct damages for delay?

There is no reason why parties can’t agree on liquidated damages for failure to perform just as they do for delays. The IChemE model forms of conditions of contract, written for the process industries where performance is at the heart of every facility, have included these provisions for many decades. In the same way as delay damages, the parties are free to agree the financial terms, provided that they fit within the legal requirement of not being out of all proportion to any legitimate interest of the innocent party, as the courts stated in Makdessi v Cavendish Square Holdings BV [2015] UKSC 67. So the parties could agree a single figure or a sliding scale of damages linked to the percentage shortfall in performance measured against the specification rather.

Can the client reject the entire works?

The other performance-related provision that often goes hand-in-hand with damages is the right of the client party to reject the entire works if the failure is so bad that the facility is either useless or economically unviable. If parties are considering including this then they need to consider the practicalities of demolition and removal, and include the methodologies in the contract. In such circumstances it is unlikely that they will find it easy to agree on anything later.

If you have any questions about the Liquidated Damages for performance shortfalls, our Construction and Engineering team will be happy to help. Please get in touch for further information.