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Contractor Missed Substantial Completion Deadline and Required to Pay Liquidated Damages


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Helou

By Gina Helou

Background
In December 2007, the contractor entered into a contract for $450,000 with the school district for window installations, building renovations, and the construction of a new building for a high school.  The contract included a provision that required substantial completion of the project by June 6, 2008.  The liquidated damages provision specified that there would be a $500 charge to the contractor for each day that passed after the deadline for substantial completion.  Due to a third-party delay, building materials for the construction of the new building were not delivered until late May 2008, setting back the contractor’s work.  Six days after the contract’s substantial completion date, the school board voted that it would enforce the liquidated damages provision in the contract.    On July 15, 2008, 39 days after the contract deadline, the architect presented the school with a letter verifying the substantial completion date as July 15.  

After having access to and use of the buildings, the school experienced several issues with the construction and plumbing.  After notifying the contractor and not receiving help with the issues, the school was forced to hire outside companies to repair the defects.  In all, the school district withheld over $21,000 in payments from the contractor, of which $19,500.00 fell under the liquidated damages provision of the contract.

Liquidated damages found reasonable and enforceable
On appeal, the Appellate Court sided with the trial court, and therefore the school district, stating that the general nature of the liquidated damages was in accordance with the contract’s provisions and language.  The court found the amount to be reasonable and proportionate with the overall costs of the project.  The contractor argued that the school district did not suffer actual damages and therefore should not be able to penalize the contractor by using the liquidated damages contract provisions.  The court disagreed with the contractor, stating the issue of actual damages has no impact on the amount of awarded liquidated damages.  The court held the liquidated damages provision existed to compensate the school district for the contractor’s failure to abide by the contracted substantial completion date, and so were properly awarded.  

Practice points
Provisions for liquidated damages are present in many construction projects, and they are commonly triggered once a contractor fails to complete a project within the agreed upon time frame, which was the situation in this case.  Typically, liquidated damages will be enforceable in situations where the actual damages resulting from delay cannot be easily determined and the amount represents a reasonable estimate of the anticipated damages that may result in the event of such a delay.  If the amount of liquidated damages in a contract is structured to be penalty or is excessive of the anticipated damages, then courts are less likely to enforce the liquidated damages provision.


 

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