Part of the Ontario construction contracts guide for owners.
Liquidated damages are one of the few clauses in a construction contract that put a firm number on lateness. Instead of proving what a late finish actually cost, the owner and contractor agree a rate in advance, usually per day, and that rate applies if the contractor is responsible for missing the completion date. For owners with a store opening, a tenant move-in or a lender deadline, that certainty is valuable.
But liquidated damages clauses fail more often than owners expect, either because the rate looks like a penalty, because the owner contributed to the delay, or because nobody can explain how the number was set. This guide explains how Canadian courts look at liquidated damages, how they compare with claiming actual losses, and how to set a rate that holds up.
What liquidated damages are
A liquidated damages clause sets, at the time the contract is signed, the amount the contractor will pay for a defined breach, most often late completion. A typical clause says the contractor will pay a fixed amount for each day between the contract completion date and the date the work actually reaches the agreed milestone, and allows the owner to deduct that amount from payments.
The appeal for owners is simple. Proving actual delay losses is slow, expensive and uncertain. A 2017 paper on liquidated damages in Canadian construction contracts, published by Osler, notes that an agreed sum relieves the owner of the burden of proving its loss. Once the owner shows the contractor caused the delay, the amount follows from the clause.
The appeal for contractors is less obvious, but real: a known rate lets them price the risk, and a well-drafted clause often limits their exposure compared with open-ended damages.
On CCDC-based projects, the standard forms can't be edited directly, so project-specific terms like a liquidated damages clause are typically set out in supplementary conditions. Our guide to common supplementary conditions to CCDC 2 covers how those amendments affect pricing.
The penalty rule: genuine pre-estimate or punishment?
Canadian courts will not enforce a clause that operates as a penalty. The traditional test comes from a 1914 House of Lords decision, Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co., which the Supreme Court of Canada adopted in Canadian General Electric Co. v. Canadian Rubber Co. in 1915. The question is whether the agreed amount is a genuine pre-estimate of the loss the owner is likely to suffer, or a sum designed to frighten the contractor into performing.
Several principles come out of the cases, as summarized in a Dentons article on Canadian construction practice:
- The test is applied when the contract is made, not when the breach happens. What matters is whether the rate was a reasonable forecast at signing.
- Calling it "liquidated damages" isn't conclusive. Courts look at what the clause actually does.
- A single sum for very different breaches is suspect. If the same amount applies to trivial and serious failures, it's presumed to be a penalty.
- Grossly excessive formulas fail. In H.F. Clarke Ltd. v. Thermidaire Corp., the Supreme Court struck down a formula it found grossly excessive and punitive.
- Difficulty doesn't defeat the clause. The fact that a loss is hard to estimate is often the reason to agree a figure, not a reason to strike it.
Robert Kennaley, writing for Landscape Ontario, gives a useful sense of scale: a $1 million, six-month contract with $100,000 per day of delay damages would very likely be struck, because no one could seriously have valued a day of delay at that amount.
The unconscionability approach in Ontario
Canadian law here isn't fully settled. In J.G. Collins Insurance Agencies v. Elsley (1978), the Supreme Court described the penalty rule as an interference with freedom of contract, and courts since then have increasingly asked whether enforcing a clause would be unconscionable or oppressive, rather than simply whether it was a genuine pre-estimate.
Kennaley points to two Ontario decisions, 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. (2005) and Redstone Enterprises Ltd. v. Simple Technology Inc. (2017 ONCA 282), that suggest Ontario courts may assess these clauses on unconscionability alone. If that's right, a liquidated damages clause negotiated between sophisticated parties could be enforced even if it bears little relation to actual loss.
In the United Kingdom, the Supreme Court replaced the pre-estimate focus in 2015 with a "legitimate interest" test in Cavendish Square Holding v. Makdessi. As Bennett Jones noted in 2019, Canadian courts have not adopted that approach. The Osler-published paper describes Canadian law in this area as unclear and inconsistent.
The practical lesson for owners: don't rely on the more flexible approach. Set a rate you could defend under the traditional test, and document how you got there. That rate should survive under either approach.
Liquidated damages versus actual damages
Choosing liquidated damages is a trade. The owner gives up the chance to recover its full actual loss in exchange for certainty.
- If the clause is valid, it generally sets the amount for the breach it covers. If actual losses turn out higher, the owner usually bears the excess.
- If the clause is struck down, the owner can still claim the damages it can prove, but it's back to the slow, expensive route the clause was meant to avoid.
- If the clause is silent on other losses, there can be arguments about whether it covers only delay or other consequences too. Good drafting says exactly which breach the rate covers.
This is why a rate set too low is also a problem. Owners sometimes pick a modest figure to avoid a penalty argument and then find it covers a fraction of their real carrying costs.
When owners lose the right to liquidated damages
A valid clause can still be lost through the owner's own conduct. The Dentons summary highlights several risks:
- Owner-caused delay. In Perini Pacific Ltd. v. Greater Vancouver Sewerage and Drainage District (BC Court of Appeal, 1966, affirmed by the Supreme Court in 1967), owner-caused delay relieved the contractor from paying liquidated damages. The risk is greatest where the contract has no workable way to extend the completion date for owner delays.
- Waiver. Taking possession, granting an extension, or ordering numerous changes that affect completion can each undermine the owner's right to claim.
- Proof of cause. The owner still has to show the contractor caused the delay. That needs a credible schedule analysis, not just a missed date.
The protection is an extension of time process that actually works. If every owner-caused delay is assessed and the completion date adjusted promptly, the liquidated damages clause still has a valid date to run from.
View the data
| Cost of late completion | Per day |
|---|---|
| Lost net rent | +$2,600 |
| Extended financing | +$1,100 |
| Consultant and owner's rep | +$700 |
| Owner staff and premises | +$400 |
| Daily rate | $4,800 |
Setting the rate
A defensible daily rate is built from the owner's real, foreseeable costs of late completion. For a commercial or retail project, those typically include:
- Lost rent or lost trading margin for the delayed period
- Extended financing and carrying costs
- Extended fees for the consultant, owner's representative and project management
- Temporary premises, holdover rent or storage
- Owner staff costs tied to the project
Write down the calculation and keep it on file. If the rate is ever challenged, a contemporaneous worksheet showing how it was built at signing is the best evidence that it was a genuine pre-estimate.
Two other decisions matter. First, the trigger: liquidated damages tied to substantial performance, to Ready-for-Takeover under CCDC 2 2020, or to an interim milestone, such as turnover of a retail unit to a tenant. Each needs to be defined precisely. Second, whether different milestones deserve different rates. A single rate applied to every possible failure invites the penalty argument.
Caps and bidder reaction
Many negotiated liquidated damages clauses also include a cap, for example a percentage of the contract price. The cap limits the contractor's maximum exposure and makes the risk insurable and priceable. Without one, contractors either add a large premium or decline to bid.
WeirFoulds has written about owners issuing non-negotiable supplementary conditions in requests for proposals and notes that proponents may walk away when they see hefty liquidated damages. The same article flags another common error: issuing a tender with the liquidated damages amount still marked "TBD." Bidders can't price a blank.
View the data
| Days late | Liquidated damages |
|---|---|
| 30 | $144,000 |
| 60 | $288,000 |
| 90 | $432,000 |
| 125 | $600,000 (cap) |
| 180 | $600,000 (cap) |
What owners should do
- Build the rate from real costs. List each cost of late completion, estimate it per day, and keep the worksheet with the contract file.
- Define the trigger precisely. Say which milestone the rate runs to and how that milestone is certified.
- Set a cap you can live with. Make it high enough to matter and low enough that strong bidders still compete.
- Run a working extension process. Assess owner-caused delays promptly so the completion date stays valid.
- Avoid waiver by conduct. Before taking early occupancy or granting extensions, check with your lawyer how it affects the clause.
- Get legal advice on the drafting. The wording, the cap and the interaction with other remedies all need a construction lawyer.
The bottom line
Liquidated damages work best when the rate is grounded in the owner's real costs, the trigger is clear and the owner manages extensions properly. A rate pulled from a template, or set high to scare the contractor, is a clause that may not be there when you need it.
Setting a liquidated damages rate for your next project, or facing a dispute over one? Book a 30-minute call with Benjamin R. Consulting.
Sources: Liquidated damages in construction contracts in Canada (2017 paper, published by Osler); MLT Aikins, The new CCDC 2 2020 contract: changes you need to know; Dentons (via Mondaq), Liquidated damages; Robert Kennaley, Landscape Ontario, Liquidated damages and deposits in construction; Bennett Jones, Supreme Court may consider enforceability of liquidated damages (2019); WeirFoulds LLP, Drawbacks of using nonnegotiable supplementary conditions in RFPs. The rate and cap examples are illustrative. This article is general information, not legal advice. Get legal advice on your contract and specific circumstances.