Liquidated Damages - Not Penalty Damages

Liquidated damages are nothing more than damages agreed to in advance as compensation for a potential future breach of contract. In construction contracts, liquidated damages are normally assessed for late completion and are stated as a per diem rate. The total liquidated damages to be assessed in the event of unexcused late completion are computed by multiplying the number of days performance goes beyond the required completion date by the per diem liquidated damage rate.

The sole permitted purpose for liquidated damages is to establish a reasonable estimate of damages that are likely to occur in the event of a breach but are hard to compute. For example, an owner knows that if the store he is having constructed is not ready on time he will lose sales and incur added carrying costs, but he may not be able to pinpoint those losses. Liquidated damages permit that owner to recover reasonably estimated losses resulting from delayed completion without the necessity of documenting actual, hard to prove losses.

Liquidated damages are enforceable in Massachusetts, but only where actual damages are difficult to ascertain, and the liquidated sum represents a reasonable estimate of actual damages. Liquidated damages are not enforceable where the Court determines their purpose or effect is to impose a penalty on the breaching party. Where actual damages are easily ascertainable and the liquidated sum is determined to be unreasonable and disproportionate to any real damage, or unreasonably excessive, the Court will only award actual damages. Where the Court determines liquidated damages are enforceable, the liquidated amount constitutes the exclusive recoverable damages.

Where liquidated damages are included in the general contract, the general contractor may be able to enforce the same liquidated damages against its subcontractors, but only to the extent the owner has actually assessed liquidated damages against the general contractor, and only to the extent any particular subcontractor is responsible for delaying actual completion.

Whether liquidated damages may be successfully attacked as disproportionate or excessive cannot be evaluated until the time of the breach. The Court will determine enforceability by comparing the specified liquidated damages against actual damages measured at the time the breach occurred. The first and best defense against the imposition of liquidated damages, therefore, is to complete on time. If that proves impossible because of job conditions, the next best course of action is to document the reasons for delayed performance and to submit timely requests for time extensions. Liquidated damages may be applied only to unexcused late completion. Late completion which does not result from breach of contract, but from causes beyond your control justifying contract time extensions, is not subject to assessment of liquidated damages or any other damages.

This newsletter is intended to provide general information of interest to the construction industry. It is not intended to provide specific legal advice or to address fact specific issues. For that you should consult your legal counsel. Corwin & Corwin LLP assumes no liability in connection with the use of this newsletter. The Supreme Judicial Court may consider this material advertising.