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Topics: Construction, Consulting, Risk Management
Liquidated Damages
How do you differentiate Liquidated Damages (LD) from Penalties ? Is it justifiable to levy LD to penalize a Contractor ?Please share your experience.
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LD values are not specifically defined in contract while penalties may be (% reduction based on timeliness for example). Penalties should be clearly defined in terms of dollar amount or reduction in value. LD values are determined by a court of law when a party to the contract/agreement can prove that it had been injured by the other party while under contract. For LD to apply there must be specific breaches to the contract that are identified in the contract.

Both LD and penalties must be clearly spelled out in the contract and reference specific breaches or activities. The difference is that penalties are known in advance and contracted to while there is no way of knowing what LD values are. These will be determined in arbitration.
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1 reply by Chandrashekhar Thatte
Feb 23, 2017 3:41 AM
Chandrashekhar Thatte
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Michael,I beg to differ from your views.I am not familiar about the terms of construction contracts in other countries.But in India,LD is clearly defined as ascertained or fixed damages for the injured party to collect as compensation upon specific breach or late performance and normally levied at 1 % of the contract or milestone stage value per week of delay limited to maximum 5 % .It is only when LD or penalty is unjustifiably levied by the Client ,such action gives rise to dispute determinable under Dispute Resolution mechanism by subjecting it to Arbitration or litigated in court.
One last thought. Because LD go to arbitration, and because the value to the injured party is unknown, many companies reject LD in terms of warranties. Contracts are written such that LD is rejected in terms of the warranties that the seller provides.
Feb 22, 2017 9:06 AM
Replying to Michael Ziyadeh
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LD values are not specifically defined in contract while penalties may be (% reduction based on timeliness for example). Penalties should be clearly defined in terms of dollar amount or reduction in value. LD values are determined by a court of law when a party to the contract/agreement can prove that it had been injured by the other party while under contract. For LD to apply there must be specific breaches to the contract that are identified in the contract.

Both LD and penalties must be clearly spelled out in the contract and reference specific breaches or activities. The difference is that penalties are known in advance and contracted to while there is no way of knowing what LD values are. These will be determined in arbitration.
Michael,I beg to differ from your views.I am not familiar about the terms of construction contracts in other countries.But in India,LD is clearly defined as ascertained or fixed damages for the injured party to collect as compensation upon specific breach or late performance and normally levied at 1 % of the contract or milestone stage value per week of delay limited to maximum 5 % .It is only when LD or penalty is unjustifiably levied by the Client ,such action gives rise to dispute determinable under Dispute Resolution mechanism by subjecting it to Arbitration or litigated in court.
You are correct. I agree with your statement and method of calculating LD (1% but not more than 5%). Yes, ideally you will want to have LD clearly identified in your contract.

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