Liquidated damages appear frequently in construction contracts. They establish an agreed daily rate of damages to be assessed against the contractor/subcontractor should it fail to complete on time. Massachusetts courts have traditionally enforced liquidated damages provisions. (See Construction Law Comments — Spring 1995). However, several recent appellate court decisions have addressed particular circumstances under which liquidated damages may or may not be recoverable.
The Massachusetts Appeals Court (the intermediate appellate court) ruled last year it would not enforce liquidated damages where the court determined liquidated damages were unreasonable when compared to actual losses incurred at the time the contract was breached. Massachusetts’ highest appellate court, the Supreme Judicial Court, however, promptly reversed that ruling. The SJC made clear liquidated damages would be enforced where (1) actual damages were difficult to ascertain, and (2) the liquidated damages agreed to by the parties were a reasonable estimate of actual damages at the time the contract was made.
That SJC ruling now defines Massachusetts law. As a result, courts will not take a "second look" to see if liquidated damages turned out to be reasonable at the time of the breach. Courts will look only to the contract negotiations to determine if liquidated damages were reasonable at the time they were agreed to. If they were reasonable then, they will be enforced.
In another decision more favorable to contractors, the SJC ruled it would not enforce liquidated damages against a contractor for late completion where the owner contributed to the delay. This means that even if the liquidated damages amount is reasonable, courts will not award them if the owner shares blame with the contractor for the delayed completion.
Liquidated damages provisions are likely to be found enforceable on most construction contracts unless the amount is so high it bears no reasonable relationship to potential actual damages. However, an owner whose conduct contributes to delayed completion will have a difficult time collecting them.
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