Liquidated Damages – Essentials for Contractors

Liquidated Damages (LDs) clauses are often used in FPSO, FSO, FLNG and other energy industry contracts as a means of ‘pre-agreeing’ the contractor’s liability, and the customer’s remedy, for late delivery (or in some cases for the contractor’s failure to meet performance guarantees).

Liquidated damages are a contractually agreed sum payable as damages for a loss caused by a breach of contract. Unliquidated damages (or general damages), on the other hand, are the ‘at law’ actual loss or damages arising from a breach of contract (general damages are not pre-set and are instead determined/ established in accordance with normal damages principles).

Contractors should consider the following when negotiating LDs:

·       The contract should provide for an acceptable well-defined LD rate (typically per day of delay) and an aggregate LD cap.

·       The LDs should be characterised as a genuine pre-estimate of the loss in question (to avoid the LDs being treated as an unenforceable penalty). Although liquidated damages do not need to correspond to the actual loss suffered, they should not be so disproportionate to the expected loss that they take on the character of an extravagant or unconscionable penalty.

·      LDs should only be triggered for delay attributable to the Contractor Group (i.e. Contractor and Affiliates and Subcontractors acting on its behalf). NB often contracts state that LDs are payable for any failure to deliver by the scheduled date, but such wording does not squarely address the cause of the delay.

·       LDs should be specified as the sole remedy or the sole financial remedy for the delay (regardless of how the delay arises - see comment below) to make it clear that the LDs are the relevant agreed pecuniary remedy for the delay event (i.e., the LDs should be in lieu of other remedies especially general damages for delay).

·      An overall LD cap should be included. This cap and the sole remedy wording should apply even where the contractor is at fault. Express words are required to achieve an enforceable limitation or release of a blameworthy liability.  Therefore, any sole remedy and LD cap wording should include ‘regardless of fault’ wording, (i.e., should apply whether the delay arises in contract (including termination), tort (including negligence) or otherwise.

·       The LD provision should be considered alongside any termination rights. Typically, the parties intend for the LDs to act as the agreed financial remedy without limiting the customer’s ability to terminate. This begs the question – what delay damages are available to the customer once the LDs are exhausted and they wish to terminate?

·        Absent clear words, LD provisions are not presumed to apply after termination; accordingly, in the event the LDs are exhausted, and the contract is terminated, the customer would ordinarily retain a claim beyond the LD cap for general damages for any additional delay (See Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29).

·       The contractor will typically want to cap its delay damage risk, at large, whether those damages are characterised as liquidated damages or general damages and whether they arise before or after termination. Accordingly, the LD cap should, in fact, become a delay damages cap that applies: (1) whether the delay damages are liquidated or general, and (2) whether those damages arise before or after termination (note also that the LD clause should survive termination).

·       If more than one LD event applies, the contractor will want to be careful that LDs are not applied concurrently (no overlapping or double charges) and that there is an opportunity to claw back any earlier assessed LDs if early delays are recovered and the overall project delivery/acceptance is on time. Alongside an LD regime, contractors may also want to consider a corresponding bonus regime for early delivery.

The foregoing post provides an overview of considerations relevant to the topic and does not constitute legal advice Readers are cautioned not to make any decisions based on this post alone. Specific legal advice, particularly for specific drafting, should always be obtained.