Liquidated Damages Provisions: The “Musts” and “Must Nots”

Recently, Georgia’s Court of Appeals issued an opinion that emphasizes the importance of reviewing liquidated damages provisions on a project-by-project and contract-by-contract basis for enforceability and applicability. In City of Brookhaven v. Multiplex, LLC, the City let a project for the improvement of a public park and elementary school area. Multiplex was the low bidder, won the work, and signed a contract with the City on June 15, 2017.

The parties’ contract contained the following provision related to project duration: “The services to be performed under this Contract shall commence on the date hereof. The initial term of this Contract shall be through December 31, 2017. Time is of the essence for this Contract. All work must be completed by December 31, 2018[sic].” Further, the Project’s Scope of Work stated: “[Multiplex] shall have 180 days from the notice to proceed to complete the project. Failure to complete the required construction as specified will result in the assessment of Liquidated Damages at the rate of $1,000.00 per calendar day.”

The City never issued a notice to proceed for Multiplex’s work. Nonetheless, Multiplex commenced work in July of 2017 and completed its work on September 28, 2018. The City sued Multiplex for not completing its work by December 31, 2017 and sought to recover liquidated damages in the amount of $271,000 (271 days of delay). After hearing cross motions for summary judgment, the trial court held that the liquidated damages provision in the Contract was a penalty and unenforceable. On appeal, the Georgia Court of Appeals agreed. It cited a three-part analysis for determining if a liquidated damages clause is enforceable. The questions the Court asked, and which a Contractor should likewise ask, were as follows:

1. Is the injury for which the liquidated damages will serve as a form of compensation otherwise difficult to measure?

In the first part of its analysis, the Brookhaven Court briefly touched on the original reason liquidated damages provisions exist in the first place: an inability to otherwise calculate the losses tied to a particular delay. The Court highlighted that public works projects often impact the lives of the public in a variety of ways in addition to the more discernable construction and material impacts caused by a contractor’s delays. This makes it difficult to quantify total impact. Where actual damages are hard to discern, liquidated damages make sense. In Brookhaven, this prong of the analysis swayed in the City’s direction.

2. Did the parties intend to provide damages in the event of a delay?

Yes, practically speaking any assessment of liquidated damages against a company will necessarily serve as a deterrent when a schedule is starting to slip on a job. However, the question from the Court was one of intent – did the parties intend to remit payment to the other if key milestones were missed or was the sole purpose of the provision to deter breach? Court’s will look at the contract language to try to determine intent, or if none exists, the actions, documents, and statements of the contract parties. In Brookhaven, the City’s representative testified that the liquidated damages were meant to be a “disincentive” and this equated, in the Court’s eyes, to a penalty. Notably, language in the parties’ contract about intent would have likely circumvented the need to look to witness testimony. This point favored Multiplex.

3. Is the sum of the liquidated damages (all told) a reasonable estimate of the probable loss the counterparty stands to suffer as a result of the delay?

According to the Brookhaven Court, a party to a contract should not arbitrarily assign a daily liquidated damages amount to a project, regardless of a project’s size, complexity, scope, and/or location. Liquidated damages provisions must be unique to the situation at hand and be a reasonable pre-estimate of the probable loss. As the Court explained, “the touchstone question is whether the parties employed a reasonable method under the circumstances to arrive at a sum that reasonably approximates the probable loss.” If not, and there is “no reasonable relation to any probable actual damage which may follow a breach, the contractual provision will be construed as an unenforceable penalty.” On this point, Multiplex won the appeal.

Thus, there are a few key items for a contractor to prioritize when seeking to enforce or challenge a liquidated damages provision:

Musts:

• Make sure that any liquidated damages provision is proportionate to the work at issue
• Confirm the date on which the liquidated damages start to accrue in writing
• Ensure that the LDs provision is being used because actual damages resulting from delays would be difficult to calculate
• Look to see if the provision explicitly states the intent behind its inclusion

Must Nots:

• Do not use blanket, cookie-cutter liquidated damages provisions and values in your standard contract. Ensure that the daily LD’s rate is proportionate to the potential damage. It is a good practice to have an estimate on which the LD amount is based, listing the various factors of why the exact amount is difficult to estimate at the time of the calculation.
• Don’t forget to document the “starting point” for the delay calculation

Regardless of whether a contractor is on a public or private job, liquidated damages provisions can usually be enforced. Likewise, even if a  standard liquidated damages provision has been enforced on one project, it does not mean that provision will pass muster the next time around. The party’s safest bet is to always review a liquidated damages clause for necessity, applicability, and reasonableness on a project-by-project basis. The onus is on the claiming partyr to do its due diligence. When in doubt, progress a job as though the clause is enforceable.