We’ve written before about contractual provisions that sometimes go unnoticed or unappreciated. Another such provision is a “liquidated damages” provision. Liquidated damages are a way to agree beforehand to the amount of damages that one party will owe the other in the event of a particular type of breach. In construction contracts, liquidated damages provisions are often used to identify the amount of damages that a contractor will owe the owner if there is a delay in completing construction.
For example, the parties might agree that the contractor will owe the owner $500 per day in damages if substantial completion is not achieved by the target date. (Often the amount is greater than $500.) Thus, if substantial completion were delayed for two days, the contractor would owe $1,000 in liquidated damages. That amount isn’t too worrisome perhaps, but the stakes get higher if the delay lasts months or even years, as can sometimes happen with construction projects.
For contractors, another risk is that contracts are often written broadly enough to impose liquidated damages even if the contractors do not cause the delay. The timing provisions of a contract will often read that in the event of a delay not caused by the contractor, it must still provide written notice to the owner (or owner’s agent) within a specified time period to excuse the delay.
Sometimes, due to the normal course of business, this notice is not provided. In such cases, the owner may argue that because it did not receive written notice by the specified time period, the contractor is responsible for the delay. The owner asserts that the liquidated damages provision was triggered and that the contractor owes liquidated damages because of the delay. The success of this argument may depend on the jurisdiction and court.
Although not all construction contracts contain a liquidated damages provision, many do and they are frequently litigated. Certain businesses keep a liquidated damages provision in their standard template construction contract. Form contracts, such as certain AIA contracts, may have placeholders for a liquidated damages provision to be included.
Ideally, contractors would have processes in place to ensure compliance with all contractual terms so that, among other things, any delays are tracked and documented and notice is provided to any necessary parties. At a minimum, however, contractors and in-field personnel should understand that delays – caused or not caused by the contractor – could have negative consequences depending on the terms of the contract. Personnel with knowledge of the potential consequences can help a business “issue spot” and return to the contract provisions to ensure compliance.
On the other side, owners and their agents should also be aware that timing, notice and liquidated damages provisions in the contract may benefit them. Liquidated damages provisions can be waived if they are not enforced in a timely manner. Although many contracts now contain “non-waiver” provisions that state that the parties do not waive any rights under the contract by delaying enforcement of the rights, some courts have found – perhaps paradoxically – that even “non-waiver” provisions also may be waived.
Because of the harsh consequences that can sometimes result from liquidated damages provisions, some requirements must be met for enforceability. These requirements vary by jurisdiction, but generally they are that the actual damages would have to be difficult to prove and the amount of liquidated damages is reasonable in light of the anticipated damages that would stem from a breach. If a court finds that actual damages were easy to calculate or that the amount of liquidated damages was set unreasonably, the liquidated damages provision will not be enforceable. Unsurprisingly, these general requirements are frequent topics of litigation.
Therefore, to avoid potentially harsh consequences, waiver of a potential benefit and unnecessary litigation, contractors and owners should have – at the least – a general knowledge of liquidated damages provisions. Such knowledge can help the parties issue spot and consult any applicable contracts for compliance.
Nicholas Karkazis is an attorney in Stoel Rives LLP’s construction and design practice group. Contact him at 916-319-4677 or email@example.com.