Liquidated damages come in many forms. With construction contracts, one thinks of a daily assessment against the contractor for late completion of the project. But any time actual damages will be difficult to measure precisely and the parties estimate those damages, at the time of contract formation, the resulting stipulated amount will be enforceable.
A recent Minnesota case illustrates how liquidated damages can be misused, resulting in an unenforceable penalty. A private construction contract, apparently drafted by the contractor, said that if the owner terminated the agreement for any reason whatsoever, the owner would owe the contractor a “consulting fee” of 20 percent of the contract price. This was not a prediction of foreseeable damages. It was penalty designed to provide the contractor with a tactical advantage.
How do you view liquidated damages? In your experience, are they usually arrived at in good faith, a useful way to expedite project administration and resolve disputes? Or are liquidated damages frequently a sword, a tactical device wielded to the advantage of one party with little regard for the actual damages that party might incur. As always, I welcome your comments.
Featured in next week's Construction Claims Advisor . . .
- Pay-If-Paid Clause Enforced Against Subcontractor
- Contractor’s Reading of Specification Did Not Support Extra Work Claim
- AIA Reciprocal Waiver Applied to Insurance Purchased after Completion
Bruce Jervis, Editor
Construction Claims Advisor