June 26, 2019

Liquidated damages in the Tanzanian construction industry

As the construction industry continues to develop in Tanzania, the use of international standard contracts has increased. In particular, we have seen the FIDIC (Fédération Internationale Des Ingénieurs-Conseils) standard form contracts used more frequently in this jurisdiction.

Tanzanian law only provides guidance in relation to LDs for contracts where one party is a governmental body.

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It is standard practice for most construction contracts, including FIDIC contracts, to contain a liquidated damages clause. As liquidated damages (LDs) provide for a pre-agreed rate of damages, payable to the employer by the contractor in the event of a contractor's delay in performing the work, the risk of delay for the employer is mitigated.

LDs, as opposed to general damages, do not require the claimant to prove that the losses claimed have actually been suffered. As such, the contract will provide for a genuine and fixed pre-agreed estimate of loss. Often this is calculated based on the amount of loss that will be incurred on a daily basis if the work is not completed on time.

It is important to note that Tanzanian law only provides guidance in relation to LDs for contracts where one party is a governmental body. There is no statutory guidance for contractual LDs where both contracting entities are private parties. In Tanzania, LDs clauses in government contracts are included pursuant to section 77(4) of the Public Procurement Act 2011.

Given the frequency with which construction projects involve public entities in Tanzania, this note will predominantly focus on LDs in the context that a government counterparty exists within the contractual structure.

Are LDs a necessity?

Pursuant to regulation 112 of the Public Procurement Regulations (the Regulations), Tanzanian law prescribes that the employer imposes on the "tenderer" LDs for "undelivered materials or goods, undelivered or delayed services or delayed works". Further, the Regulations imply a cap of LDs in the event that no such cap is pre-agreed in the contract.

Notwithstanding the above, given the nature of construction projects and the tendency for delays to occur, employers should generally take a cautious approach and negotiate the inclusion of a LDs clause, thus decreasing the likelihood of dispute over payments for delayed works.  LDs may also be beneficial to contractors as they provide an effective means to cap their liability for delay which can be priced into their bid before entering into a contract.

Of course, if the employer and contractor are private entities, the inclusion and negotiation of LDs provisions is of particular significance, given that there is no underlying statute with maximum rates already provided upon which to rely on. As such, the importance of mitigating the risk of delay through the inclusion of LDs is heightened, particularly due to the often unequal bargaining positions between the parties.

Can the contract stipulate a daily rate and an overall amount of damages?

The contract can stipulate a daily rate of LDs from between 0.10% to 0.15% of the contract value, per day, up to a sum equivalent to the amount of the performance guarantee.

Regulation 112(3) of the Public Procurement Regulations further provides that, the maximum amount of the LDs shall be equal to the amount of the performance bond or guarantee established in the contract.

Can the damages stipulated within the contract exceed those prescribed by the Regulations?

Whilst the Regulations are not strictly authoritative on the amounts of LDs to be agreed, it is strongly advised that the LDs prescribed under the contract remain within the parameters set out by the Regulations. This will mitigate the risk of any successful challenge by the contractor should the LDs be disputed. Indeed, as indicated above, the Regulations prescribe limits on LDs in order to guard against overly punitive and excessive compensation.

Can the amount stipulated in the contract be revised by a Court?

Pursuant to section 74(1) of the Law of Contract Act, a Court will have the discretion to revise the amount stipulated. This is despite the fact that no damage has been suffered. However, the damages awarded by the Court cannot exceed the amount prescribed in the contract. As such, whilst a Court cannot simply reject payment of LDs because no damage has occurred, it is bound by the confines of the contract and the amounts stipulated within it. Nonetheless, employers should be aware because this does mean that courts have the discretion to reduce LDs from the actual amount stipulated in the contract.

Performance LDs

Performance LDs are often included in construction contracts where the works involve a measurable output, for example a power plant. Performance LDs can be included as a means of compensation if a specified task is not done to the standard specified in the contract. Whilst not as common as LDs, which relate to delays, it is worth considering their inclusion into a construction contract, particularly if there are specific output, efficiency and availability requirements. Unlike LDs, no cap is specified for performance LDs under Tanzanian law.

In summary, LDs are fundamental to any well-structured construction contract. Whilst general damages will provide protection for actual loss suffered owing to delay, LDs provide an added layer of protection for the employer for loss that cannot be quantified. By contractually agreeing to a rate of damages prior to the contractor undertaking the works, employers are safeguarded against significant losses, and contractors have an understanding of how much they may owe the employer if they are in breach. LDs also serve the additional purpose of ensuring that the contractor completes the works fully in a timely manner.

Enforceability of LDs

The principles outlined below are applicable in Tanzania given that Tanzania is a common law jurisdiction.

  • Penalty: the amount of LDs should be a genuine pre-estimate of the loss likely to be sustained by the employer. The English courts are beginning to move away from this principle and have recently held that LDs need not solely be a genuine pre-estimate of loss, but can reflect the wider commercial context of a transaction and seek to protect legitimate commercial interests.  However, it is crucial to note that if the level of LDs is extravagant, exorbitant or unconscionable, then the courts are unlikely to enforce them.

  • Prevention Principle: if the employer prevents the contractor from completing the works on time then the courts may find that time has become 'at large' – this means the contractual completion date will fall away and the contractor is required to complete the works within a reasonable time. Along with the contractual completion date, the LDs provisions will also fall away.

  • Uncertainty: contractors may also argue that the scope of LDs clause is too uncertain in its meaning or effect to be enforceable, although in practice, courts are generally reluctant to find all or part of a contract void for uncertainty.

Case in point – English Court of Appeal

Triple Point Technology Inc v PTT Public Company Limited

This case examined what happens in respect of an LDs clause if the works are incomplete and the contract is terminated.

The facts:

The Contractor (Triple Point) was late in completing one of the phases of works. Triple Point demanded payment for the incomplete works. The Employer (PTT), holding that payment was subject to the fulfilment of milestones, refused to make payment. Triple Point suspended its works so PTT terminated the contract. PTT claimed LDs.

The decision:

The court followed earlier authorities, confirming that once the contract is terminated, the contractor is not under an obligation to complete the works. Therefore, LDs cannot apply.

This meant that PTT could only seek LDs for work that had already been completed as the contract had already been terminated.

In light of this decision, a belts and braces approach should be taken when drafting LDs clauses in order to ensure that if the party in question wants to guarantee that LDs apply in the event of termination or abandonment, they do not apply only when works are complete. As such, it would be sensible to factor in a number of different completion dates.

This briefing is prepared for clients and contacts of Clyde & Co Tanzania. We aim to keep our clients abreast of developments in Tanzania as they happen and if you have any questions on the issues raised above please contact us using the details provided.

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