Law Articles
2026-10-15
Law Articles
A Brief Analysis of the Grounds for Reducing Liquidated Damages for Delay in Performance under Construction Contracts
【Zhong Yin Law Firm Partner Charlotte Wu / Attorney Yiju Wu】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
In a construction contract, the key contractual terms extend beyond the scope of work, materials, and construction methods. The completion deadline is also a material term of the contract. If a contractor fails to complete the work on time for reasons attributable to the contractor, it may be liable for damages and substantial contractual penalties under the contract, potentially resulting in significant financial losses. This article briefly examines the types and legal nature of contractual damages and penalties and explains how contractors may seek judicial reduction of excessive amounts under the Civil Code of Taiwan to mitigate their losses.
Ⅰ. Types of Liquidated Damages and Penalties for Delay in Performance under Construction Contracts
Pursuant to Article 250 of the Civil Code, the parties to a contract may agree that the debtor shall pay a specified sum as liquidated damages or a penalty in the event of non-performance of an obligation. Unless otherwise agreed by the parties, the agreed amount is presumed to constitute liquidated damages, serving as the agreed total compensation for loss arising from non-performance (hereinafter, “liquidated damages”). By contrast, the parties may expressly agree to a contractual penalty (hereinafter, a “penalty”) to encourage timely performance. In such cases, the non-breaching party may claim the penalty in addition to damages, subject to the terms of the contract and applicable law.
(1) Liquidated Damages
Liquidated damages refer to an amount agreed upon by the parties in advance, before a breach occurs, as compensation for the loss arising from the breach. Once a breach occurs—for example, where a contractor fails to complete the work by the agreed deadline, thereby delaying performance—the owner generally does not need to prove the specific amount of loss attributable to the contractor’s delay. The owner may, in principle, claim the agreed amount directly in accordance with the contract.
However, the owner must still establish that loss has occurred. If the owner has suffered no loss, the owner may not claim liquidated damages under this category. Furthermore, once the owner has claimed liquidated damages for delay in completion pursuant to the contract, the owner may not additionally seek compensation from the contractor for other losses arising from the same delay, as the agreed amount is intended to provide the total compensation for such loss.
(2) Penalties
A penalty is intended to compel the parties to perform their contractual obligations in a timely manner. Upon non-performance, the creditor may claim the agreed penalty regardless of whether the creditor has suffered any loss. Furthermore, if the creditor has suffered loss due to the debtor’s incomplete or defective performance, the creditor may seek additional damages in addition to the penalty, subject to the contract and applicable law. Unlike liquidated damages, a claim for a penalty does not preclude a separate claim for damages arising from delay or other non-performance.
The burden of proof also differs between these two types of contractual payments. Liquidated damages are intended to establish in advance the amount payable as compensation for loss arising from non-performance. Accordingly, although the party claiming liquidated damages is relieved of the burden of proving the specific monetary amount of the loss, that party must still prove that the loss actually occurred. A penalty, on the other hand, serves a punitive purpose rather than merely compensating for loss. Therefore, the party claiming a penalty is generally not required to prove the existence or specific amount of loss, or the causal relationship between the breach and the loss. The claimant need only establish that the other party has breached its contractual obligations, subject to the applicable contractual terms and legal requirements.
II. Standards for the Judicial Reduction of Excessive Liquidated Damages or Penalties
When a contractor experiences a delay in completion for various reasons, the first step is to determine responsibility for the delay and the number of days attributable to each party. If the delay is attributable to the owner—for example, where the owner changes its instructions or requirements during construction, requiring the contractor to procure different materials or adopt revised construction methods—the resulting delay should not be attributed to the contractor. The contractor may therefore argue that it should not bear liability for the delay during that period. Similarly, where the delay results from force majeure events, such as natural disasters, the contractor may argue that the delay was not attributable to it. Examples include work stoppages required by law due to strong winds or heavy rainfall, or labor shortages caused by quarantine measures during an epidemic.
However, where the delay is determined to be attributable to the contractor, and the contractor is held liable for the delay, damages, and contractual payments, Article 252 of the Civil Code provides that a court may reduce an excessive agreed amount to a reasonable level. Accordingly, a contractor seeking a reduction may initiate litigation or arbitration, as applicable, and request that the court or arbitral tribunal reduce the amount. The contractor bears the burden of establishing that the agreed amount is excessive. According to the prevailing judicial approach in Taiwan, the reduction mechanism under Article 252 applies to both liquidated damages and penalties. A court will first determine whether the agreed amount is excessive and then consider the relevant circumstances in determining the appropriate reduction.
(1) Determining Whether the Agreed Amount Is Excessive
In determining whether a penalty is excessive, courts generally consider factors including the actual loss suffered by the creditor, the circumstances and seriousness of the debtor’s breach, and the financial capacity of both parties. For example, in a case1 in which a contractor unilaterally reduced the number of floors in a construction project by altering the design and subsequently refused to proceed with construction under various pretexts after the owner discovered the change the court calculated the owner’s loss at NT$22.74 million. Given the seriousness and intentional nature of the contractor’s breach, the court considered the circumstances of the breach, general socioeconomic conditions, and the financial capacity of both parties. It held that the owner’s claim for a penalty of NT$23.4 million was reasonable and not excessive.
As for liquidated damages, which are intended to compensate the creditor for loss, courts assess whether the agreed amount is excessive by considering objective circumstances, socioeconomic conditions, the nature and extent of the loss suffered by the creditor, and all benefits the creditor would have obtained had the debtor performed the contract as agreed. Where the obligation has been partially performed, the court may also reduce the amount by reference to the benefit the creditor has received from that partial performance. Particular attention should be paid to the creditor’s actual losses, including both actual expenses incurred and profits or benefits lost, in determining whether the agreed amount is excessive.
(2) Factors Considered by Courts When Reducing Liquidated Damages or Penalties
1. Actual Loss Suffered by the Creditor
The actual loss suffered by the creditor as a result of the debtor’s delay is one of the principal factors considered by the court. Such loss includes both actual losses incurred and losses of anticipated benefits.2 For example, in Civil Judgment No. 3962 of 1980 of the Supreme Court, the court observed that, under the creditor’s proposed method of calculation, the contractual amount would have reached NT$345,550, nearly half of the total construction contract price. After considering the nature and total value of the project, the effects of high tides during construction, and the creditor’s own admission that the delay in completion had caused relatively little loss, the court found it more appropriate to calculate the amount at 0.5‰ of the total contract price per day. On that basis, the total amount was reduced to NT$57,585. Similarly, in Civil Judgment No. 15 of 2025 of the Taiwan High Court Taichung Branch, the court noted that the creditor would incur loss in the form of default interest accruing from the day following completion of the acceptance inspection due to the debtor’s delay in payment of construction fees. After considering these circumstances, the court found the creditor’s claim for NT$760,000 in contractual damages excessive and reduced the amount to NT$50,000 as a more reasonable outcome that balanced the interests of both parties.
2. All Benefits the Creditor Would Have Obtained Had the Debtor Performed on Time
Courts also consider “all benefits that the creditor would have obtained had the debtor duly performed its obligations” when determining whether the agreed amount is excessive. Where the amount substantially exceeds the benefits that the creditor would have obtained from timely performance, the court may find it excessive. In Civil Judgment No. 1536 of 2025 of the Supreme Court, the court stated that the assessment of whether an agreed amount is excessive should be based on all benefits the creditor would have obtained had the debtor performed its obligations as agreed. Whether the amount is reasonable must further be assessed in light of objective circumstances, socioeconomic conditions, and the losses suffered by the parties. This principle applies regardless of whether the agreed amount serves as a penalty or as liquidated damages.
3. General Objective Circumstances and Socioeconomic Conditions
When determining whether to reduce an agreed amount, courts consider the socioeconomic conditions prevailing when the contract was entered into, together with other relevant objective circumstances. No single factor is necessarily determinative. For example, in Civil Judgment No. 2523 of 2017 of the Supreme Court, the court considered a delay in the repair of a chimney and observed that such delay would ordinarily increase the creditor’s personnel coordination costs and related expenses. Taking into account the debtor’s performance, Taiwan’s socioeconomic conditions during the relevant year, and the potential losses suffered by the parties, the court held that the contractual deduction of NT$3.9 million was excessive. The amount was therefore reduced to 10% of the aggregate amounts allocated to the relevant work items, or NT$2,788,744.
4. Extent of Partial Performance by the Contractor
Under Article 251 of the Civil Code, where an obligation has been partially performed, the court may reduce the agreed amount by reference to the benefit received by the creditor from such partial performance. Accordingly, if a contractor has completed most of the construction work but has failed to complete certain remaining portions, the court may take the extent of partial performance into account when reducing the amount. For example, in Civil Judgment No. 877 of 2022 of the Taiwan High Court, the court considered the creditor’s loss equivalent to rental income arising from the debtor’s delay in completing and handing over the property. The court also considered the debtor’s assertion that certain work items associated with the third progress payment—namely, the reinforced concrete structure and installation of aluminum windows—and the interior carpentry work associated with the fourth progress payment had remained incomplete. Given that only approximately 70% of the project had actually been completed, the court reduced the contractual amount payable for the delay to 30% of the amount originally claimed.
5. Total Contract Price and the Proportion Represented by the Agreed Amount
Where the agreed amount represents a substantial proportion of the total construction contract price, the court may find it excessive and reduce it accordingly. As noted above, in Civil Judgment No. 3962 of 1980 of the Supreme Court, the amount calculated using the creditor’s proposed method would have reached nearly half of the total construction contract price. This was one of the circumstances supporting a reduction.
6. Losses Arising from Re-Tendering the Project
Where a construction contract is terminated because of the contractor’s breach and the owner subsequently re-tenders the project, the court may reduce the agreed amount if the owner’s actual expenditure decreases as a result of the new arrangement. In such circumstances, a substantial contractual payment may no longer serve its intended compensatory function. In Civil Judgment No. 1275 of 2019 of the Supreme Court, the court noted that, following the re-tendering of the project, the actual construction payments made by the creditor were NT$6,716,968 less than the amount stipulated in the original contract, excluding liquidated damages for delay, other contractual damages, and reductions resulting from design changes. After considering the general objective circumstances, socioeconomic conditions, and all other relevant factors, the court concluded that the agreed amount was excessive.
7. Harm to the Public Interest
Where a contractor delays completion of a public construction project, courts generally recognize that the delay may adversely affect the public interest, including traffic safety and public health. To protect the public interest, courts are generally less inclined to reduce the agreed amount where the amount is not manifestly disproportionate to the circumstances. In Supreme Court Civil Ruling No. 1814 of 2023, the court emphasized that the project involved the public interest and that the debtor was expected to complete the work promptly in accordance with the contract. However, as of May 11, 2006, only 39.16% of the work had been completed, prompting the creditor to terminate the contract. The original project was subsequently divided into two parts, and the unfinished work was further divided into three separate procurement packages with changes to the scope of work, resulting in additional expenses. Considering the substantial losses suffered by the creditor and the other relevant circumstances, the court held that the creditor’s appropriation of the performance bond as a penalty was neither excessive nor manifestly unfair. Accordingly, no reduction was warranted.
Ⅲ. Conclusion
Contractors performing construction contracts may encounter delays due to various factors, some within their control and others beyond it, and may consequently face substantial claims for contractual damages or penalties. Recent Taiwanese judicial decisions concerning construction contracts indicate that courts conduct a substantive, case-by-case assessment when determining whether an agreed amount for delay in performance is excessive. Relevant considerations include the parties’ financial circumstances, prevailing market conditions, the progress of the construction work, the seriousness of the breach, whether the owner has actually suffered loss, and the public interest. Depending on the circumstances, a court may reduce the agreed amount to a reasonable level either on its own initiative or upon a party’s application, in accordance with the applicable provisions of the Civil Code.
References
1 Taiwan High Court, Civil Judgment No. 97 of 2016, Second Retrial on Appeal.
2 Supreme Court, Civil Judgment No. 2345 of 2021; Supreme Court, Civil Judgment No. 1406 of 2021.
If you require legal advice regarding trust structures, or need to review the legal terms of trust contracts provided by financial institutions or trust companies, please feel free to contact:
Attorney Wu Jiehua
charlotte.wu@zhongyinlawyer.com.tw
tel +886 2 2377 1858 ext 8888