Recent years have witnessed an ongoing debate about the validity of capping general damages via contract provisions for liquidated damages. This discussion gained momentum with a couple of contradictory verdicts in the last two years – casting ambiguity on a common feature of construction contracts.
The topic came to light as liquidated damages clauses frequently depict a cap on the total amount that can be claimed. One verdict approved of this provision, while another differed in its viewpoint. What was once perceived as a definitive practice is now open to discussion and interpretation in the legal circuit.
Liquidated damages are pre-negotiated amounts, commonly part of contracts, aimed at compensating a harmed party in case the other party fails to fulfill its duties defined by the contract. Their essential objective is to prevent costly and time-consuming litigation. The aspect of capping the overall claim poses uncharted territory, raising questions about the fairness of such a practice.
On one hand, these caps might be seen as a risk mitigation tool for companies. On the other hand, they might be perceived as limiting a claimant’s potential recovery. Having the total claim capped, even beyond the scope of liquidated damages, might be perceived as restraining the right to claim fair compensation.
This dichotomy was best articulated through Bryan Cave Leighton Paisner’s discussion, originally published in the RICS Construction Journal on July 13, 2023. The established norms of contract law and liquidated damages are experiencing substantial revisions. Going forward, there would be a need for legal practitioners to navigate these uncertain grounds adeptly for their clients.