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last updated: 31st July 2011

You may have heard of penalty clauses in the context of a contract having to be performed on time. In fact, clauses that are deemed ‘penalty clauses’ are not legally enforceable as they normally mean that the supplier will have to pay an over-inflated figure if it does not perform the contract on time. A penalty clause is seen as a ‘scare’ tactic and if determined as such by the supplier, it will hold little weight.

Therefore, where there is a deadline for the completion of a contact and it is vital that the supplier fulfils the contract on time, you should consider adding a clause with a realistic figure which will be payable if the contract is not fulfilled by the given data.

This is called a liquidated damages clause and must be a genuine pre-estimate of damages based on the losses which will be incurred as a result of non-performance of the contract by the supplier.

The amount payable by the supplier will normally be a percentage of the total value of the contract, payable for each day/week that the contract completion date is late. For example, a contract for the supply and delivery of lecture chairs to be delivered one week before the start of the autumn semester, may contain a liquidated damages clause stating the a charge of 3% will be levied for each week, or part thereof, that the chairs are late. So if the contract was valued at £100,000 and the chairs were 10 calendar days late ie 1½ weeks; the liquidated damages clause would recoup £6,000 to compensate the organisation for the inconvenient caused by the late delivery.

It is recommended that you seek advice from your Head of Procurement when setting up contract where the delivery of the requirement is time-critical.
 

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