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Liquidated damages, also referred to as liquidated and ascertained damages (LADs), [1] are damages whose amount the parties designate during the formation of a contract [2] for the injured party to collect as compensation upon a specific breach (e.g., late performance). [3] This is most applicable where the damages are intangible.
Other than pecuniary damages, which is the most common type of damages recovered, there are a few other recognizable types of damages under English law, and still others that have their validity subject to ongoing debate: Injured feelings and disappointment; Injured reputation; Speculative damages; Liquidated damages and penalty; Quantum meruit [4]
Liquidated damages are always calculated on calendar days. Liquidated Damages may be capped at a percentage of the contract sum. It is normal for Australian construction contractors to seek liability relief by trying to introduce a cap on Liquidated Damages, typically 10% of the contract sum.
Liquidated damages are an estimate of loss agreed to in the contract, so that the court avoids calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses may serve either a compensatory or a punitive purpose and, when aimed at the latter, may be referred to as "penalty clauses".
A cost plus contract states that a client agrees to reimburse a construction company for building expenses such as labor, materials, and other costs, plus additional payment usually stated as a percentage of the contract's full price. This type of construction contract is an alternative to lump sum agreements.
The Hudson Formula derives from Hudson's Building and Engineering Contracts and is used for the assessment of delay damages in construction claims.. The formula is: (Head Office overheads + profit percentage) ÷ 100 x contract sum ÷ period in weeks x delay in weeks
Under common law, a liquidated damages clause will not be enforced if the purpose of the term is solely to punish a breach (in this case it is termed penal damages). [23] The clause will be enforceable if it involves a genuine attempt to quantify a loss in advance and is a good faith estimate of economic loss.
Penal damages are liquidated damages which exceed reasonable compensatory damages, making them invalid under common law.While liquidated damage clauses set a pre-agreed value on the expected loss to one party if the other party were to breach the contract, penal damages go further and seek to penalise the breaching party beyond the reasonable losses from the breach. [1]