Liquidated damages are used to set a predetermined amount of compensation if a party fails to meet certain obligations, such as completing the project on time. Not surprisingly, they are a common feature of construction contracts. When disagreements arise over delays or enforcement, these provisions often become a central issue in construction disputes.
What Are Liquidated Damages?
Liquidated damages (LDs) are contractually agreed-upon sums that the non-breaching party (usually the owner) can claim if specific breaches occur, most commonly for delays in completion. For example, a contract may stipulate $1,000 per day for every day the project is delayed beyond the scheduled completion date.
The key characteristic of such damages is that they are pre-estimated damages. Essentially, they attempt to forecast the owner’s likely financial harm due to a delay, rather than requiring the owner to prove actual losses after the fact. This is particularly useful in large-scale projects where calculating real-time financial impacts of delay can be complex and burdensome.
Are Liquidated Damages Provisions Enforceable?
For a liquidated damages clause to be enforceable, courts generally require that:
- The harm from delays or violations is difficult to estimate at the time of contracting, and
- The amount specified is a reasonable estimate of the likely damages,
If the liquidated damages are excessive or punitive, courts may invalidate the clause. In such cases, the owner would then need to prove actual damages to recover compensation.
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Common Issues with Liquidated Damages Claims
Liquidated damages claims can trigger many legal issues. The sections below discuss the most common:
1. Disagreements Over Who Is Responsible for the Delay
A common issue is whether the contractor is truly responsible for the delay. Contractors often argue that delays were caused by the owner (e.g., late approvals, design changes) or by uncontrollable external factors (e.g., weather or supply chain disruptions). If both parties contributed to the delay, the contractor may argue that LDs should be waived or reduced. Determining fault often requires detailed schedule analysis and expert testimony.
2. Impact on Payment and Performance
When owners enforce LDs by deducting them from final payments or withholding retention, it can place significant financial strain on contractors and lead to disputes. Contractors may contest such deductions as improper, especially if they feel the project was substantially complete or usable by the owner. In some cases, disagreements over change orders, such as added work or altered timelines, can further complicate these payment and performance issues.
3. Waiver and Estoppel Issues
If an owner (1) accepts late performance without enforcing LDs or (2) fails to notify the contractor of their intention to enforce them, they may waive their right to collect such damages. Similarly, estoppel may apply if the contractor relied on the owner’s conduct or silence, thereby causing delays. These issues often surface in litigation when owners attempt to retroactively apply LDs after a period of inaction.
Contact an Experienced Houston Construction Dispute Lawyer for Help
Liquidated damages can help manage construction delays and incentivize the timely completion of projects. However, they also carry significant legal and financial risks if imposed or enforced improperly.
At Porter Law Firm, our experienced Houston construction dispute lawyers can help you understand your rights in a dispute over liquidated damages. Contact us today for a confidential consultation to review your rights and responsibilities under a construction contract.