An educational blog devoted to Florida contruction law topics by Florida Bar Board Certified Construction Lawyer, Trenton "Trent" Cotney. Please visit www.trentcotney.com for more information. Disclaimer below.
Subscribe to this blog
Follow by Email
Liquidated Damages Provisions in a Construction Contract
Trent Cotney, P.A.
Liquidated damages are a fact of life in modern construction contracting. However, even if your contract contains a liquidated damages provision and the owner has assessed liquidated damages, that does not mean the assessment is valid or enforceable. There are a number of ways you might be able to prevent an owner from keeping contract proceeds that are rightfully yours. This article will provide the reader with an idea or two that will help keep hard-earned contract proceeds in the contractor’s pocket.
In a breach of contract situation, liquidated damages are designed to provide a means to compensate the non-breaching party when the actual damages are not readily ascertainable. In other words, when the non-breaching party’s actual damages will be difficult to determine in the event of a breach, then the parties are allowed to stipulate in their contract that a set sum of money will be paid in lieu of having to prove up the actual damages.
In construction contracts, the liquidated damages clause is usually tied to timely completion of the work by the contractor and usually allows the project owner to collect liquidated damages upon late completion. For example, for each day that the work is not complete past an agreed upon date, the contractor will have to pay the owner $x per day. Liquidated damages can be agreed to in any type of contract, and not just construction contracts. In a real estate sales contract, the parties might stipulate in their contract that if the buyer reneges and fails to close, then the seller gets to keep the earnest money deposited by the buyer.
A liquidated damages amount is intended to compensate the owner for the other party’s breach of the contract. If the provision seeks to do anything other than provide reasonable compensation, then the clause is really a penalty, and as such, will not be enforced. Merely because the parties title the provision as a “liquidated damages” provision is not determinative of whether it is really a penalty. Whether a provision is a valid liquidated damages clause or an unenforceable penalty depends on the facts of each case.
For example, if a provision that is labeled “liquidated damages” is not intended to compensate the owner, but is really intended to coerce the contractor into completing the work on time, rather than compensating the owner for delay damages, then the clause is a penalty. Similarly, if at the time the parties entered into the contract, the owner’s actual damages are “reasonably ascertainable,” then there is no reason to stipulate to the liquidated damages amount and it will not be enforced.
Another argument that has succeeded in avoiding an otherwise valid liquidated damages clause is where the liquidated damages amount “shocks the conscience” of the court. In other words, if the stipulated sum is simply too great in comparison to the contract value itself, then the liquidated damages will not be enforced. This analysis compares the stipulated sum with the contract value. For example, in Hook v. Bomar, 320 F.2d 536 (5th Cir. 1968), the loss of a $30,000 deposit on a $95,000 contract was found unconscionable, and the liquidated damages provision was not enforced.
Furthermore, liquidated damages also are not enforceable if the non-breaching party contributed to the other party’s default. In a construction contract setting, if the owner contributed to the delay in the completion of the contract, then the owner is not permitted to assess the daily liquidated damages for those delay days caused or contributed to by the owner.
Liquidated damages tied to completion of the work generally cannot be assessed after the project has reached substantial completion. Liquidated damages are intended to compensate the owner for late completion, and by definition at substantial completion the owner has functional use of the project. Thus, at substantial completion, the owner is no longer incurring damages.
By way of illustration, on a construction project an owner may want $1000/day in liquidated damages to compensate the owner for lost rent and extended project administration for each day the work is not complete. However, once the project is substantially completed, the owner can rent the property, so that portion of the owner’s damages included within the stipulated $1000/day is no longer being incurred. If the owner seeks the entire liquidated damages amount for days after substantial completion until final completion, a strong argument can be made that no post-substantial completion liquidated damages are allowed even if the owner is incurring continued administration costs. The better liquidated damages clause would state that upon substantial completion, the liquidated damages will be reduced to $500/day or some other reasonable figure to compensate the owner for the extended project administration required to obtain final completion of the project.
Owners routinely withhold contract proceeds under the argument that the contractor is liable for liquidated damages. However, even if it appears that the liquidated damages are proper, the prudent contractor will not accept the assessment at face value because there are many ways to defeat a liquidated damages clause. Hopefully, this article will provide the reader with a way to recover the withheld funds.
Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Which health and safety
violations occur most often on the job site today? With construction accounting
for one in five workplace deaths in 2014, higher penalty payouts in place and
new rules for tracking and recording violations looming, we asked the Occupational
Safety and Health Administration which rules are broken most often on
construction-related projects. As it turns out, the
worst offenses have largely stayed the same over
time. It should come as little surprise that fall-protection mishaps top
the list. With more than 20,000 incidents reported in the last four years, it
remains the leading cause of death in
construction. Following close behind are faulty ladders and
inefficient eye and face and head protection. This summer, OSHA
announce its interim rule raising maximum civil penalties by
78% to meet the requirements of a federally mandated increase
designed to ensure that the fines reflect inflation. The rule went into effect
on Aug. 1, bumping the maximum fee for serious vio…
Need a new roof? Why not one that can generate energy?
Solar company SolarCity, which is in the process of being acquired by electric car maker Tesla, plans to show off a new product, a roof integrated with solar panels, at an event on October 28 in San Francisco.
Tesla CEO and SolarCity chairman, Elon Musk, made the announcement on Twitter on Thursday morning, and said the combined company would unveil a solar roof with an integrated battery and a Tesla charger.
While SolarCity SCTY3.07% has offices in San Mateo, Calif., Tesla has its factory in Fremont, Calif., and a new retail outlet in downtown San Francisco. The companies’ merger is expected to close in the coming months, but it could also be delayed by aseries of shareholder lawsuits.
Musk announced plans for SolarCity’s new roof product in early August, on one of SolarCity’s earnings calls. It was the first call Musk had joinedsince he announced earlier in the summer that Tesla planned to purchase the solar installer.
The historic First Presbyterian Church at 2 North Court St. was completed in 1903, and its church office building, known as the Rufus Putnam House — just around the corner, at 9 North College St. — was completed at about the same time.
But the church office porch, which was enclosed and had a metal roof, had deteriorated over the decades and suffered from leaks. The staircase was also breaking up a bit, said Keith Morrow, a member of the First Presbyterian Church property committee.
“There was no heat or air conditioning, so the space wasn’t very usable,” Morrow said. “It was too hot in the summer and cold in the winter.”
So about a month ago, the congregation leadership decided to take action.
“We decided to put it (the porch) back to the way it was originally,” he said, adding that RVC Architects of Athens took on that task.
The results are striking, and getting positive comments from passersby. A new, unenclosed wooden porch is being constructed, which as of Thursday, had workers …