Liquidated Damages: Can They Really Dock My Money for Being Late?

‍‌​​‌‌​​‌‌​​​​​‌​​‌‌‌​‌‌‌‌‌​‌‌‌​​‍Most big contracts have a line like: "LDs: £X per week of delay, capped at Y% of the Contract Sum." That's the client trying to lock in a clear price for you being late, instead of arguing their losses from scratch.

You're not stuck paying any random number. The Supreme Court in Cavendish v Makdessi reset the rules: LDs are generally fine, but only if they protect a legitimate business interest and aren't "out of all proportion" to that interest.

1. What LDs actually are (and how they differ from "normal" damages)

In a construction contract, LDs are a pre-agreed daily/weekly rate the contractor pays if they miss the completion date without an extension of time.

Key points:

• They replace the need for the client to prove their actual delay loss (rent, finance, lost income, extra prelims etc.) -- the number in the contract is the number.

• If LDs are valid, the client usually can't come back for more for the same period of delay; LDs are normally the full remedy for that breach.

• If the LD clause is invalid or doesn't apply (e.g. no completion date, or it's a penalty), the client can still go after general damages for delay -- but then they have to prove the loss.

So LDs are not a bonus for the client; they're meant to be a fair, predictable alternative to a big argument later.

2. The penalty rule after Cavendish v Makdessi -- what changed

Before Cavendish, everyone parroted "must be a genuine pre-estimate of loss or it's a penalty." That's not the test anymore.

The Supreme Court said:

• The penalty rule only bites on secondary obligations -- what happens after you breach, like paying LDs because you're late.

• The real question is whether the LD clause is out of all proportion to any legitimate interest the innocent party has in performance -- not just whether it matches a neat loss calculation.

• A client can have a wider legitimate interest than strict financial loss (e.g. keeping a retail scheme open, maintaining a brand, freeing up capital), and an LD clause can legitimately bite harder than a bare spreadsheet loss as long as it isn't "extravagant, exorbitant or unconscionable."

Outcome for you: it is now harder to knock LDs out as penalties. If they're vaguely sensible and tied to a real commercial interest, they're likely to stick.

3. What they can claim under an LD clause

If the LD clause is drafted properly and you're late with no EOT, this is the sort of thing they can usually do.

They can typically:

• Deduct LDs at the contract rate for each day/week of culpable delay, up to any stated cap (e.g. 10% of the contract sum).

• Use LDs as a set-off against sums otherwise due, or call on security (retention, bonds) if the contract allows.

• Rely on LDs instead of having to prove their actual delay loss in detail.

Courts have been comfortable enforcing LDs that aren't precise pre-estimates as long as they look broadly in line with the commercial risk -- for example, rates reflecting loss of rent or finance costs on a delayed development.

4. What they can't do (or where LDs fall over)

LDs aren't a free-for-all. There are real limits.

Common ways LDs become unenforceable or unusable:

• No valid completion date / mechanism left -- if the contract machinery for setting completion dates collapses (e.g. through variations and extensions handled badly), LDs can fail because there's nothing clear to measure delay against.

• LD rate is plainly absurd -- if the number is "out of all proportion" to any legitimate interest (for example, ruinous LDs on a minor delay with no real commercial impact), a court can still call it a penalty and refuse to enforce it.

• Wrong breach / wrong party -- LDs are usually tied to delay to practical completion by a specific contractor. They don't automatically apply to every minor breach, and they don't let the client skip the contract's EOT process.

• Post-termination periods -- there's been case law debate on whether LDs run past termination or stop at termination and general damages take over; you can't just assume LDs bite all the way through without checking the drafting and case law.

And if the LD clause fails as a penalty, the client isn't left with nothing -- they just have to prove general damages the old-fashioned way.

5. How to protect yourself before and during the job

The smart move is to deal with LDs up front, not argue about them after you're already late.

Before you sign:

• Check the LD rate and cap: does it look in the right ballpark for the client's real loss, or is it obviously "punishment" money? If it's miles over the top, push back or at least document the commercial rationale.

• Check the completion structure: single date or sectional completion? You don't want LDs geared to the whole job for slipping one tiny section.

• Watch for LDs attached to vague triggers (e.g. "failure to meet KPIs" without clear measures) -- penalty arguments get messy here.

During the job:

• Keep on top of EOT notices -- if there's employer delay, changes, late info, or force majeure-type events, use the programme and clauses to protect time; that's how you cut LD exposure.

• Track concurrent delay (your delay plus theirs at the same time); how that affects LDs depends on the contract and case law, but good records are your only chance.

• If they start threatening LD deductions, check:

  • have they properly certified delay?
  • have EOT claims been dealt with?
  • are they within any cap?
  • is the project actually complete in the contractual sense?

You're not going to win many "LDs are a penalty" fights post-Cavendish, but you can absolutely win on how much delay is yours, whether the clause really bites, and whether they've followed the contract properly.

Liquidated damages (LDs) cheat sheet

Before you sign:

• LD rate and cap look broadly in line with real potential loss (rent, finance, income), not "punishment" money.
• Completion dates/sections are clear so you know what the LDs apply to.
• LDs are tied just to delay, not vaguely to every minor breach or KPI failure.
• You understand how EOT, changes and employer delays cut or stop LDs.

Before they deduct:

• Practical completion and/or sectional completion actually certified under the contract.
• Your EOT claims have been made and decided (or they've failed to decide them in time).
• Their LD calculation matches the contract rate, dates and any cap -- and they're not double-counting or going beyond what the clause covers.

If you can tick those off and the numbers still look brutal, that's when it's worth getting advice on whether the clause or the way they've used it can be challenged.

Disclaimer: SiteKiln gives you plain-English information, not legal advice. Talk to a solicitor before making big decisions on live disputes.

What to do next

• Check the LD rate and cap in your current contract and work out whether the numbers look proportionate to the client's real potential loss.
• Keep on top of extension of time notices -- if there is employer delay, variations or late information, claim the time properly so LDs do not bite unfairly.
• If LDs are being threatened or deducted, check whether practical completion has been properly certified and whether your EOT claims have been dealt with.
• Track concurrent delay carefully with records and programmes -- good evidence is your best defence.
• If the LD rate looks absurd or the deduction does not follow the contract, get legal advice on whether the clause can be challenged.

Sources

• Housing Grants, Construction and Regeneration Act 1996 -- https://www.legislation.gov.uk/ukpga/1996/53/contents
• Cavendish Square Holding BV v Makdessi [2015] UKSC 67 (Supreme Court guidance on penalties)

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