Construction Contracts and Liquidated Damage Provisions: Qualifying Factors, Unenforceable Penalties, Mutual Delays

Description

Liquidated damages provisions are common in construction contracts to guard against damages that the owner or a contractor might suffer if a project is delayed beyond the completion date outlined in the contract. These provisions appear in both public and private construction contracts.

In the absence of a liquidated damages provision, to recover damages for delay, an owner or contractor must prove that the contractor delayed the project and the actual damages caused by the delay. Demonstrating actual damages is a difficult task that requires detailed proof that ties the loss to the period of undue delay with reasonable certainty. Thus, being able to rely on a liquidated damages for delay provision can be quite useful.

Liquidated damages are meant to approximate actual damages. Courts will consider whether the liquidated damages amount is based on a reasonable estimate of actual damages made by the owner or contractor or whether the liquidated damages amount was simply a random arbitrary amount.

Most jurisdictions operate under some form of non-apportionment rule, which states that if the owner or contractor whom the liquidated damages clause benefits are responsible for any amount of the delays to project completion, they cannot recover liquidated damages unless the contract authorizes project delays to be apportioned between the parties so that liquidated damages can be assigned to the contractor or subcontractor based on the delays they are responsible for. Construction counsel must then be prepared to show evidence of who is at fault.

Listen as our expert panel discusses best practices in drafting and negotiating liquidated damage provisions in construction agreements, how to distinguish a reasonable provision versus an unenforceable penalty, and when a non-apportionment clause might be utilized. The panel will discuss best practices in working with various stakeholders to mitigate liability and costs in construction delays.