Lilian Kyaruzi (<law@liliankyaruzi.com>) is a legal director in
Isi-dora & Company and an inter-national development enthusi-ast.
The views expressed here do not necessarily reflect those of Isidora
& Co.
Given that public
or government procuring entities in Tanzania are the biggest players in
the country's construction sector, it is normal practice for the
preponderance of construction contracts, including
FIDIC contracts for
construction, to embody a liquidated damages ('LDs') clause. LDs clauses
are included in government contracts in accordance with section 77(4)
of the Public Procurement Act, 2011 ('the Act') read together with
regulation 112 of the Public Procurement Regulations, 2013 ('the
Regulations').
Thus, 'Bingwa
Construction' and a government procuring entity negotiating and agreeing
a contract will insert a clause in the contract to the effect that if
Bingwa Construction breaches the contract or fails to perform its
primary obligations (e.g. completion of a project by a specific date) in
favour of the procuring entity, Bingwa Construction pays a pre-agreed
amount as LDs in the event Bingwa Construction delays in performing its
obligations. Since Bingwa Construction and the procuring entity don't
necessarily have to contend with the common law rules on causation,
remoteness, and a duty to mitigate losses, the LDs clause can be set in
motion to ascertain financial compensation.
The LDs clause
reduces the risk of delay for the procuring entity and speeds up
recovery of money by dampening the probability of disputing payments for
delayed works. From the standpoint of Bingwa Construction and other
contractors, LDs are a good way to limit liability for delay which can
be factored into the bid price. In the absence of a pre-agreed limit on
LDs in the contract, the contract can specify a daily rate of LDs of
"0.10 up to 0.15 per cent of the contract value per day up to a sum
equivalent to the amount of the performance guarantee" (regulation
112(2)(b) of the Regulations).
Nevertheless,
regulation 112(3) requires that the maximum LDs be "equal to the amount
of the performance bond or guarantee established in the contract". As a
contractor may argufy with a government procuring entity, on the LDs,
and successfully challenge the LDs, it is recommendable that LDs
stipulated in the contract stay within the range prescribed by the
Regulations. This is so because Tanzanian courts have the discretion to
revise, as per section 74(1) of the Law of Contract Act, Cap 345, and
reduce the amount of pre-agreed LDs in the contract.
The enforceability
of a LDs clause in Tanzania--a common law country--can be challenged on
several grounds, including that it does not cover the breach at issue,
it is uncertain and hence void, and that it is a penalty. In Cavendish
Square Holding BV v Talal El Makdessi and Parking Eye Ltd v Beavis
(joint appeals) [2015], the UK Supreme Court considered the question as
to whether certain contractual clauses which imposed a sanction were
unenforceable due to them being penalty clauses. In line with the UK
Supreme Court's decision, if the amount of the LDs is beyond the norm
and thus possibly extravagant, exorbitant or unconscionable, then the
courts are unlikely to enforce them. The decision, though not binding on
Tanzanian courts, is of great weight and persuasive value.
The potential
challenges around enforcement of a LDs clause calls for a clear
commercial rationale of the clause. To this end, when drafting the LDs
clause, the crystallization of the LDs event and the computation of the
payout should be succinct and to the point. In addition to expressing
LDs as being 'due and owing' once the LD event occurs, the right to
set-off the LDs claim against any money due to the contractor should be
provided for. While the foregoing is not an exhaustive discussion on LDs
drafting considerations, it gives you a sense of the need for care in
drafting a LDs clause to ensure that it is effective and enforceable and
not capable of challenge.
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Instructively,
Tanzanian law does not provide guidance on LDs where the contracting
parties are both private persons, instead providing guidance where one
of the contracting parties is a public or government entity. Even so, in
relation to LDs, it is necessary to consider, on a case-by-case basis,
each construction project and each contractor's obligation and
situation.
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