Liquidated Damages

A pre-agreed sum payable by a supplier to a contracting authority upon a specified breach, most commonly late delivery. The amount must reflect a genuine pre-estimate of loss, not a penalty.

What Liquidated Damages Are

Liquidated damages (LD) clauses fix, in advance, the financial remedy a contracting authority will receive if a supplier breaches a defined contractual obligation. In public-sector contracts the trigger is almost always failure to deliver goods, works, or services by the agreed date or to the agreed standard. The sum is expressed either as a fixed amount or, more commonly, as a rate per day or week of delay.

The Legal Distinction: Genuine Pre-Estimate vs Penalty

English law enforces LD clauses only where the agreed sum is a genuine pre-estimate of the loss the authority expects to suffer. A clause that imposes a sum out of all proportion to any conceivable loss risks being struck down as an unenforceable penalty, following the Supreme Court's clarification in *Cavendish Square Holding BV v Makdessi* [2015] UKSC 67. Contracting authorities should therefore document their loss estimate at the point of contract drafting — for example, by reference to re-procurement costs, operational disruption, or regulatory exposure.

Use in Standard Public-Sector Contracts

LD provisions appear in most standard frameworks used across UK public procurement:

• NEC4 contracts address delay damages under clause X7, requiring a rate per day to be stated in the Contract Data.
• JCT contracts carry liquidated and ascertained damages provisions under clause 2.32.
• Cabinet Office model services contracts include LD schedules tied to key milestone dates.

Under the Procurement Act 2023 (in force February 2025), contracting authorities retain broad discretion to set LD rates, but those rates must be proportionate and clearly stated in the contract notice or associated documents where they may influence supplier pricing.

Setting the Rate

Authorities should calculate LD rates by reference to:

• Direct costs of delay (staff time, interim arrangements, hire of alternatives)
• Consequential costs such as penalties payable to third parties
• Reputational or regulatory exposure where quantifiable

Rates are typically expressed as a daily figure with an aggregate cap, often between 10% and 15% of contract value, to limit supplier liability to a commercially viable level.

Practical Considerations

Liquidated damages are not automatic — the authority must serve notice correctly and track delay periods accurately. Failure to follow contractual notice provisions can waive the right to recover. LD clauses also sit alongside, rather than replace, the authority's right to terminate for persistent or material breach, and should be drafted to make that relationship explicit.

Where loss is genuinely difficult to pre-estimate, authorities sometimes combine a modest LD rate with a general damages reservation, though this requires careful drafting to avoid the clause being read as a penalty.