Penalties/damages

A construction or civil engineering contract comes with certain pre-conditions for the employer and the contractor. Among others, these detail the expectations the employer has of a contractor to fulfil an obligation to meet particular criteria and finish sections of the project within a specific time period and budget.

When a contractor does not complete a project or part thereof on or before the agreed date, the employer can impose penalties on him or lodge a claim for damages.

In terms of liquidated damages, the usual circumstances involve a contractor wanting to claim for an extension of time to the completion date when he believes that he is not responsible for the delay (that way, he avoids having to pay liquidated damages or penalties). Conversely, the employer attempts to do just that – exercise his right to deduct a predetermined “liquidated amount of damages, or a penalty, from monies due to the contractor” if he believes he is responsible for his company’s failure to meet the completion deadline.

A claim for damages puts the “innocent party back into the position it would have been in had the contract been properly performed”, effectively compensating them for the inconvenience imposed by a breach, or breaches, of contract. This is the case with any breach of contract… the innocent party can rightfully try to recover damages caused by the breach and that were “reasonably foreseeable”.

Construction and civil engineering contracts should contain a provision for liquidated damages that specifies a fair and accurate pre-estimate of the loss that could be incurred by an employer after a project delay. This would predetermine how much compensation would be necessary to place the employer in the position he would have been in had there been no delay.

In South Africa, a top legal firm’s experience is that an employer “will accept penalties (liquidated damages) for delay and performance ranging between 10% and 15% of the contract price”. Insurance coverage is also a consideration to protect both parties under these circumstances.

It is advisable to secure legal advice in managing disputes that arise out of these claims or, better yet, employ a legal consultant on-site.