Liquidated Damages and the “Prevention Principle”
- Liquidated damages are a contractual provision that allows the owner to collect a specified amount of money from the contractor for each day that the project is delayed.
- Liquidated damages are typically used in lieu of actual damages, which can be difficult to quantify.
- To be enforceable, liquidated damages must be reasonable. In other words, the amount of liquidated damages must be a fair estimate of the actual damages that the owner will likely suffer as a result of the delay.
- If the contractor fails to complete the project on time, the owner may be entitled to collect liquidated damages. However, the owner may be barred from collecting liquidated damages if the owner has caused or contributed to the delay. This is known as the “prevention principle”.
The Prevention Principle
The prevention principle is based on the idea that a party cannot benefit from its own wrong. In other words, if the owner has caused or contributed to the delay, the owner cannot then turn around and collect liquidated damages from the contractor.
There are a few things that contractors can do to avoid being hit with liquidated damages:
- Check what the contract states about liquidated damages.
- Comply with all of the terms of the contract, including the schedule.
- If the contractor encounters a delay that is beyond its control, promptly notify the owner and request an extension of time in accordance with the contract.
- If the owner fails to grant an extension of time, the contractor should document the delay and its impact on the project.
By taking these steps, contractors can help to protect themselves from being hit with liquidated damages. For further advice please contact the Mullane & Lindsay Litigation and Dispute Resolution Team.
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