By: Elizabeth K. Miles
Construction contracts often include a clause that identifies a stipulated or “liquidated” damage amount for unexcused delay. These clauses assess a fixed sum for each day of delay, thereby relieving the owner from proving its actual damages caused by delay. Although generally thought to protect the owner, liquidated damages clauses may also benefit the contractor by allowing it to factor the cost of possible delay in its bid. They also save both the owner and contractor the time and expense of litigating actual damages in court or arbitration.
To be enforceable in Wisconsin, liquidated damages must be reasonable. That is, they must reflect a rational estimate of the owner’s likely damages caused by delay. Liquidated damages that are far greater than the owner’s actual damages will be deemed unreasonable and unenforceable. This does not mean that the owner then recovers nothing, however; it simply means that the owner then bears the burden of proving its actual damages caused by delay.
In negotiating a liquidated damages clause, an owner and contractor should discuss the basis for the daily rate and prepare a schedule that details how the estimated figure was reached. This documentation will support a finding of enforceability. For example, a clause assessing liquidated damages of $500 per day was deemed unenforceable where it was nothing more than the amount the owner thought would get the job done on time. Without any analysis as to how much damage the owner would suffer for every day of delay, the $500 per day assessment was deemed a unenforceable penalty.
A pre-contract schedule also may support a finding of insurance coverage, depending on the language of the contractor’s policy. Be aware, however, that in many cases liquidated damages will not be an insured claim. This issue should be explored with an insurance provider before the contract is executed.
Wisconsin courts also consider the difficulty of proving actual damages and how the clause is labeled when determining enforceability. Easy-to-prove actual damages indicate the liquidated damages are unreasonable, and words like “forfeit” or “penalty” invite an inference of unreasonableness. In Wisconsin, a liquidated damages clause will not be enforced if the owner suffers no damages from delay.
Before signing the contract, contractors should make sure that liquidated damages are the owner’s exclusive remedy for delay. An owner should not be able to recover both liquidated damages and actual damages. Nor should the contract make liquidated damages optional.
Contractors also should ensure that the liquidated damages are triggered by failure to achieve substantial completion or beneficial occupancy, not final completion. Punch list items and repair work that does not interfere with the owner’s occupancy should be easy to calculate and, therefore, not appropriate for liquidated damages.
Finally, owners and contractors should consider including an early completion bonus in the contract. An early completion bonus benefits both parties by incentivizing and rewarding early delivery and acts as a counterweight to liquidated damages, making their inclusion in the contract more palatable to the contractor.
If you have any questions concerning construction contracts for your business, please contact your Davis|Kuelthau attorney, the author noted above or our Construction Industry Chair linked here.