CONTRACT LIABILITY CLAIMS: Liquidated damages in Tanzania gov’t contracts

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.

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.