Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

Liquidated damages are a pretty frequent feature in construction contracts. Love them or hate them, you hear about them. Sometimes you live with them. This post and the next will look at some of the frequent nagging questions and issues you're likely to have involving liquidated damages, including:

• What are liquidated damages?
• Why you might use liquidated damages?
• How to increase the odds that your liquidated damages clause will be enforced.

What Are Liquidated Damages?

Liquidated damages are an amount of money that contracting parties agree on as the amount of damages one of them can recover if the party breaches the contract. Usually they apply to some specific type of breach of the contract, not any breach of any promise anywhere in the contract. In construction contracts, you'll most often see liquidated damages apply when the contractor breaches the contract by not finishing the work on time.

Frequently you'll see some formula for liquidated damages. For instance, $1,000 per day that substantial completion is late. If the prime contractor is five days late in substantially completing their work, they owe the owner $5,000. The owner usually deducts the $5,000 from a payment to the contractor.  I can't recall ever seeing a contractor actually pay liquidated damages to an owner. I'm sure it's happened.  But I haven't seen it yet. 

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The Illinois Senate is considering a bill to amend the Illinois Contractor Prompt Payment Act (the "Act") affecting when and how (1) owners pay prime contractors and (2) prime contractors pay their subcontractors.

If enacted, this bill (HB 0344) will:

• Limit retainage on private construction projects to a maximum of 5 percent of payments to prime contractors and subcontractors.
• Limit retainage after 50 percent completion to a maximum of 2.5 percent.

This bill has already passed in the Illinois House. The Senate Assignments Committee is now considering this bill.

If enacted into law, this bill will limit how much retainage owners and prime contractors may hold and when they may withhold it. This bill will also affect (1) construction lenders' relationships with their borrowers and (2) sureties' relationships with the contractors and subcontractors they bond.

If you would like to comment on this bill:

• Contact your Illinois State Senator and the members of the Senate Assignments Committee; and
• Contact the government affairs staff of interested trade associations like these:
• Associated General Contractors of Illinois
• The Builders Association
• Illinois Construction Industry Committee
• Building Owners and Managers Association International
• International Council of Shopping Centers

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After years of working on architects agreements, I've noticed that it seems like more often then not the architect starts work on a design before they and the owner get around to actually signing an architects agreement.  The same goes for contractors and construction contracts. 

This brings up a problem that actually has a couple of solutions.  One is to have a preliminary contract - perhaps for a limited scope of work and a limited amount of time that will then be superseded by a comprehensive architects agreement or construction contract.  Many call these early start agreements.  

But sometimes its too late for an early start agreement or those involved in the project don't want to spend the time and the money to negotiate and prepare one.  So the alternate is to include a prior work clause in the architects agreement or construction contract. 

Prior Work Clauses In Architects Agreements

The prior work clause applies the agreement  retroactively to cover architectural services or construction work provided before the owner and architect enter into the architects agreement. Or before the owner and contractor enter into the construction contract.  Parties can also use a prior work clause to serve a kind of audit function helping ensure that there are no pre-contract fees, reimbursable costs, costs of the work, or claims that will crop up later.

Here is my short list of things a prior work clause for an architects agreement should have:

• Retroactive application.  The agreement applies to all pre-agreement effective date services provided by, or on behalf of, the architect.  Whatever standards the agreement imposes on the scope and quality of the architects services will apply to services provided before the owner and architect entered into the agreement.

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Why Define Claims?

Designers, contractors, owner, lenders, and the like often get into disputes involving the design or building of a construction project. When this happens, we usually say "they're making a claim" or something like that.  Other times, we say "they're waiving their claims."  But what do we really mean when we refer to claims.  Especially when we refer to claims in the abstract - when we're referring to claims generally at large, not a specific set of identified claims?    

When referring to claims, it's usually a good idea to ensure that everyone involved and affected agrees on what qualifies as a "claim".  Especially when someone is waiving claims, as they often do in a Change Order, a settlement agreement, or a prior work clause.  Few things in business are as annoying as years of depositions, document review, motions, and counter-motions, all over whether "it was the intent of the parties" to waive this or that claim.  Of course defining what qualifies as a claim won't guarantee you'll avoid this; but your odds will be better.

So when I write a contract I usually define the term "claim".  There's several options for doing this.

• Use the definition in Section 15.1.1 of the American Institute of Architects' A201 General Conditions of the Contract For Construction (2007 edition).  This is the definition I see most often.  But I usually find it's not broad enough and leaves things out that should be in the definition of claim.
• Write your own custom definition.  Like all custom work, this takes a lot of thought, time, and care.  Plus there's a good chance of overlooking something.
• Use the definition in Section 101(5) of the United States Bankruptcy Code . This is the definition I usually use.  Why??

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As promised in the last post about choice of law in architects agreements and construction contracts, here is a list identifying 16 of the states that have enacted mandatory choice of law statutes for affecting construction contracts along with cites and free links to those statutes.  I'll be grateful to anyone who contacts me to add more states with cites to their statutes.

 

Select Mandatory Construction Choice of Law Statutes

 

State	Cite
Arizona	Ariz. Rev. Stat. § 32-1129.05
Connecticut	Conn. Gen. Stat. Ann. § 42-158m
Illinois	815 ILCS 665/10
Indiana	Ind. Code § 32-28-3-17
Louisiana	La. Rev. Stat. § 9:2779
Minnesota	Minn. Stat. § 337.10
Montana	Mont. Code § 28-2-2116
Nevada	NRS §108.2453
New York	N.Y. Gen. Bus. Law, Chapter 35-E, § 757
North Carolina	N.C. Gen. Stat. § 22B-2
Ohio	Ohio Rev. Code § 4113.62
Oregon	Or. Rev. Stat. § 701.640
Pennsylvania	73 P.S. §514 (Penn. Statutes Title 73, Chapter 14A, §514)
Rhode Island	R.I. Gen. Laws § 6-34.1-1
Tennessee	Tenn. Code § 66-11-208
Texas (Formerly)	Tex. Bus. & Com. Code §35.52 (Repealed in 2007)
Wisconsin	Wis. Stat. § 779.135

 

 

 

 

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