What is the difference between the liquidated damages and the delay penalty?

Answer 1

Liquidated damages as used in the construction industry are damages (monetary) to the owner of the building charged to the builder for delay in completion of the structure in the alloted time.

The opposite of this is the delay clause, which is where the contractor would claim damages against the owner or architect for delaying the construction process by not processing paperwork in a timely manner, or by not answering questions in a timely manner, or by failing to process change order requests.

The Acheley (sp) Formula is used for calculation of the damages due, based on a complicated formula which includes variables such as monthly volume, projected profits, length of delay and other items. I believe the current AIA documents have excluded this by inserting a No Damage for Delay clause.

Answer 2

Liquidated Damages shall fully compensate any losses of profits caused by breach; calculated ex ante (at the time of contracting). Sum granted has not to be decided by judges.

Liquidated damages, however, are determined ex ante, so at the time the promisor decides whether to breach or to perform, he may already know that the stipulated damages are over- or undercompensatory. If they are overcompensatory, the promisor might overperform; if they are undercompensatory, the promisor might overbreach. Penalty Clauses(PC) are supra compensatory sanctions; PCs award an amount of money to the injured party which creates a real incentive. PCs can be awarded for breaches in the past.

Danger: Promisees induce breach to get incentive.

But: Signalling Function of PCs?

The idea that penalty clauses can be useful as a signal for a promisor's reliability was first articulated by Posner (1977, p. 93). According to Posner, this signalling function is important especially for new entrants in the market who have not yet built up a reputation. An effective way for a promisor to convince other parties that he will perform as promised is to offer a penalty clause against himself. Source:http://www.scribd.com/doc/239514/Penalty-Clauses-and-Liquidated-Damages

Including lots of further information, reading recommended.

by J.stu

Answer 3

Damages are costs incurred by the aggrieved party; penalty or punitive damages are awarded to punish the wrongdoer and discourage future similar offenses. Punitive damages are only awarded when the offender has behaved egregiously.