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

In Building Overrun Cases on the Rise, journalist Ed Hammond at the Financial Times reports that late completion disputes are already rising this year in the UK.  He also mentions:

• With projects started in better times now yielding lower occupancy and returns, owners are more inclined to pursue claims against their contractors
   
• Liquidated damages claims for late completion are rising in frequency and amount
   
• Austere times and pressure on margins are compelling owners and contractors to become more contentious and adversarial
   
• The Construction Products Association predicts a 3% decrease in spending for 2010

Will these tends continue in the in the UK?  Will they cross the Atlantic to North America too?

As construction disputes intensify and relationships become more strained, your contracts will come under more scrutiny.  Are you and your contracts fortified for that?

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As promised in the last post, this post is about ensuring you can enforce a liquidated damages clause in your contract. It's also about other practical issues affecting liquidated damages and getting them to fulfill more of your expectations.

First, there's nothing that will ensure that liquidated damages will be enforced, or they'll do what you hope. Enforcement is at the mercy of judges.  And if you don't know already, they're unpredictable.  But there's things you can do to better the odds.  Or, if you're opposing liquidated damages, lower the odds.

Principal Elements Of Enforceable Liquidated Damages

In most cases, liquidated damages must have 5 principal elements (this varies from state to state and country to country, so you and your lawyer must check applicable law very closely):

• Actual damages must be difficult to quantify.


• The amount must be liquidated (i.e., agreed on and set in advance)


• The amount must be reasonable.


• They must be compensation, not a penalty.


• They must be exclusive (i.e., the only remedy available).



More on each of these below.

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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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