This article is authored by Mosaddika Akter, Junior Associate and Zareef Muhammad Zubair, Associate, Mahbub & Company.
Delay is one of the most persistent and financially significant risks in infrastructure and development projects. In Bangladesh, where large-scale public and private construction projects are expanding rapidly, timely completion is commercially critical. Liquidated damages (LDs) therefore play a central role in construction contracts.
Liquidated damages are a pre-agreed sum of money specified in a contract that one party must pay to the other in the event of a breach, typically for delay or non-performance. LDs are intended to represent a genuine pre-estimate of the loss that the innocent party is likely to suffer if the contract is breached. Instead of requiring the injured party to prove the exact amount of loss after the breach occurs, the parties agree in advance on the amount payable.
In many jurisdictions influenced by the Contract Act, 1872, liquidated damages are enforceable only to the extent that they amount to reasonable compensation and courts may reduce the stipulated sum if it appears excessive or punitive. The purpose of liquidated damages is compensatory, not to punish the breaching party.
From the employer’s perspective, LD clauses in construction contracts operate as a risk allocation mechanism that protects against time-related losses such as financing costs, loss of revenue, extended supervision expenses and reputational harm. For contractors, however, LD clauses represent a defined financial exposure that may be imposed even where actual loss is difficult to quantify or strictly prove. Disputes frequently arise over delay attribution, entitlement to extension of time (EOT), procedural compliance in certifying delay and whether the stipulated amount is legally enforceable in full.
The core legal tension lies between contractual freedom and statutory control under the Contract Act, 1872. Unlike traditional English common law, which historically distinguished sharply between penalties and liquidated damages, Bangladeshi law, as stated above, subjects stipulated sums to a statutory test of “reasonable compensation.” This framework narrows the practical distinction between penalties and genuine pre-estimates of loss and places significant discretionary power in the courts.
Legal foundation of liquidated damages in Bangladesh
The legal framework governing liquidated damages in Bangladesh rests primarily on the Contract Act, 1872, the Public Procurement Act, 2006 and the Public Procurement Rules, 2025 for public contracts.
In public construction contracts, Rule 50 of the Public Procurement Rules, 2025 mandates recovery of agreed liquidated damages for delay. Importantly, the rule clarifies that payment of LD does not relieve the contractor from the obligation to complete the works. This reflects the compensatory, rather than substitutive, nature of LDs which compensate for delay but do not excuse performance.
Section 73 of the Contract Act, 1872 establishes the general rule for contractual damages. It permits compensation for losses that arise naturally in the usual course of things or losses that the parties knew, at the time of contracting, were likely to result from breach. This incorporates the principle of foreseeability and remote and indirect losses are excluded. In construction projects, foreseeable losses from delay may include extended site overheads, escalation costs, financing interest and loss of operational revenue.
Section 74 governs contracts where a sum is named as payable upon breach or where a penalty is stipulated. It provides that the aggrieved party is entitled to “reasonable compensation not exceeding the amount so named,” whether or not actual damage is proved. This is the central provision governing LD clauses in Bangladesh. The stipulated sum is not automatically enforceable in full. Courts may award a lesser amount if the sum appears excessive. The amount named operates as a statutory ceiling. Proof of actual loss is not strictly mandatory, but compensation must be reasonable.
The phrase “reasonable compensation” is not defined in the statute. Judicial interpretation links it to foreseeability of loss, proportionality between breach and compensation, the commercial context and the intention of the parties at the time of contract formation.
Section 75 allows compensation where a contract is rightfully rescinded. In construction disputes, this may become relevant where termination follows prolonged delay or fundamental breach.
Application in construction contracts
In Bangladeshi construction contracts, LD clauses typically include a daily or weekly rate, often expressed as a percentage of the contract price per day of delay, a cap on total LD commonly ranging from 5-10% of contract value and application upon failure to achieve the completion date or key milestones. Under public procurement documents, LD is calculated per unit of delay and deducted from interim payments. If the maximum cap is reached, termination rights may arise.
Delay is measured against the contractual completion date as adjusted by any granted Extension of Time (EOT). The EOT mechanism is therefore central to LD disputes. If delay is excusable and EOT is granted, LD cannot apply for that extended period.
Imposition of LD usually requires notice of delay, determination or certification by the engineer or consultant and formal assessment before deduction. Failure to comply with contractual procedure can render LD deductions vulnerable to challenge, even if delay exists.
Defences available to contractors
Contractors commonly rely on extension of time where delay is attributable to variations, late approvals or employer-related causes. They may invoke force majeure where events beyond reasonable control prevent timely completion. The prevention principle also applies, meaning an employer cannot benefit from its own default. Where both parties contribute to delay, concurrent delay issues arise and apportionment becomes legally complex and contentious.
Interaction with other remedies
Once LD is validly imposed, the employer generally cannot claim additional general damages for the same period of delay unless expressly reserved in the contract. LD is typically deducted from interim certificates. Payment of LD does not discharge the contractor’s obligation to complete the works. LD may also interact with performance guarantees, as employers sometimes recover delay-related sums through encashment of bank guarantees, subject to contractual and banking law constraints.
Practical drafting considerations
To enhance enforceability under Bangladeshi law, LD clauses should clearly connect the LD rate to anticipated delay-related losses, include a reasonable cap commonly between 5–10% of the contract value, state that the sum represents a genuine pre-estimate of probable loss, provide a transparent method for calculating delay, specify procedural steps for certification and deduction and ensure proper linkage with EOT provisions. Although labels are not decisive under Section 74, careful drafting strengthens the argument that the clause reflects reasonable compensation rather than a punitive measure.
Conclusion
Under Bangladeshi law, liquidated damages clauses are enforceable but subject to judicial scrutiny under Section 74 of the Contract Act, 1872. Courts prioritize reasonableness and proportionality over strict contractual wording and may reduce stipulated sums that appear excessive. Proof of actual loss is not always mandatory but compensation must be justifiable. In construction disputes, conflicts typically arise from delay attribution, EOT entitlement and procedural compliance rather than from the abstract validity of LD clauses. As Bangladesh’s infrastructure sector continues to expand, well-drafted and carefully administered LD clauses will remain essential tools for balancing commercial certainty with statutory fairness.
