Loss in the Context of Liquidated Damages

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In this recent article for Construction News, I explored the suggestion that an employer is required to mitigate its loss in the context of liquidated damages:

“It is well established that a claimant cannot recover losses which it could have avoided by taking reasonable steps (the “duty to mitigate”), but does this duty apply to liquidated damages?

Aligning the two seems counter-intuitive considering the nature of LADs as a pre-agreed compensation and cap on the contractor’s liability for culpable delay. After all, how can one mitigate a pre-agreed loss?

This question can arise in cases of partial possession.

A leading construction law textbook proposes that, where LADs are running, “an employer who, in all the circumstances, was unreasonable in refusing the contractor’s offer of possession of a completed part of the works might be open to arguments in favour of a proportional reduction in [LADs] for failing to mitigate.”

However, partial possession is intended to be consensual and at the employer’s request. It might seem unfair for an employer who can take partial possession to refuse to do so and then claim LADs.

On the other hand should a contractor effectively be able to force an employer to take partial possession? Taken to its extreme this would result in contractors being able to reduce LADs by offering possession of any useable part of the works the instant it was ready. It would be surprising if that were right.

Looking beyond partial possession (where the contract may at least make provision for pro-rating LADs) it becomes even more difficult to imagine how LADs could be reduced to reflect a failure to mitigate.

However, where LADs are found to be unenforceable and an employer has failed to mitigate his actual loss, he will regret that failure. The duty to mitigate can never therefore be safely ignored, even where there are LADs.”