Not So Guaranteed: Can Small Losses Render a Sizable Liquidated Damages Provision Unenforceable?

A “Liquidated Damages” provision should be a key part of your playbook when entering a construction contract. These damages typically apply when a party misses a performance deadline. The value of damages is usually expressed in a certain amount of dollars per day.Liquidated Damages are intended to avoid the difficult task of figuring out the economic impact of delayed performance. In many cases, an accurate estimation is quite difficult and can quickly create a dispute. This dispute can lead to increased expenses, including litigation expenses. Liquidated Damages provisions create predictability: the cost of a breach is known at the time the contract is signed. Building off that, resolutions to disputes are more streamlined than without the provision, because the parties have less to interpret.As you may guess, these provisions are not bulletproof. Some courts are particularly cautious when determining their enforceability; given the provision’s appearance as a “penalty.” Courts will refuse to enforce the provision if the amount of per-day damages is greater than what is “reasonable.” What if the amount of liquidated damages appeared reasonable at the time of contracting, but – for whatever reason – far less damages are incurred? Is the provision enforceable?Such was the issue in a recent Virginia construction dispute. White Oak Power Constructors v. Mitsubishi Hitachi Power Sys. Ams. There, the Court held actual damages must only be reasonable “at the time of the contract…” Therefore, evidence of actual damages was inadmissible in determining the reasonability of the provision. However, the Court noted that Virginia originally employed a “retrospective” approach. There, a Court would determine the reasonableness of damages at the time of the breach. If a jurisdiction employs a retrospective approach, then incurring far less damages than the agreed sum would almost certainly render the provision unenforceable.In Nebraska, the provision is enforceable if it is reasonable either at the time the contract is entered or at the time of the breach. Aramark Unif. Servs. v. Meylan Enters. This rule bodes well for the enforceability of your liquidated damage provision but still requires careful formulation of a reasonable amount of per-day damages at execution of the contract.Concerned about how to keep the size of your liquidated damages reasonable and enforceable? We recommend you contact an experienced construction attorney.