THE A, B, C’S OF LIQUIDATED DAMAGES

1. Introduction
2. Necessity for Contract Provision
3. Drafting the Clause
4. Enforceability of Clause
5. Matters of Proof
6. Preliminary Conclusion

The topic of liquidated damages is one that defies subtlety. Liquidated damages are reasonably common in construction contracts and, typically, not very complicated. By and large, the law that relates to the enforceability of these provisions has remained constant and predictable, probably since shortly after the Magna Carta. We encounter them all of the time.

One finds, however, principally among our clients, that liquidated damages can be somewhat of a mystery. Contractors, again typically, hate to see them in their contracts. Many owners see these provisions as providing both ample protection against contractor delays and a not so subtle hammer designed to “incentivize” the contractor to meet its schedule. When you ask your owner client how she calculated the liquidated damage amount, the answer is likely to generate, at best, heartburn and, at worst, cardiac palpitations.

The purpose of this paper is to provide a slight refresher on the principles that underlie the development and enforceability of liquidated damages provisions in construction contracts. With the new AIA general conditions and its joint waiver of consequential damages, which nonetheless permits the owner to collect liquidated damages related to “direct” damages, it is likely that we will encounter liquidated damages provisions on an ever increasing basis. It will be important for us to advise our clients on the pros and cons of these contractual provisions, and to clarify the many misconceptions that exist about them.

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