Whether during contracting or on the eve of litigation or arbitration, whether representing an owner, a contractor, or a sub, the analysis of delay damages issues can be a minefield for the construction lawyer. This article gives high-level advice about three major delay damages issues.
Liquidated Damages Provisions
Clearly, the most efficient way for an owner (or contractor looking to a sub) to collect for delay occurs through an enforceable liquidated damages provision. Typically expressed in terms of a per diem rate for each day of project delay, the use of stepped or escalating per diem amounts has also been recognized. These provisions offer an easy method for allocation of damages associated with construction disputes, documentation of firm expectations for all parties involved, and avoidance of significant proof issues.
The determination of whether a contractual provision for damages is a valid liquidated damages provision or an unenforceable penalty clause is a question of law. There is no fixed rule applicable to all liquidated damage agreements, and each one must be evaluated by its own facts and circumstances. Many states follow the Restatement (Second) of Contracts (1981), section 356, which provides as follows:
(1) damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on ground of public policy as a penalty.”
United States v. Bethlehem Steel Co., 205 U.S. 105 (1907); Stock Shop, Inc. v. Bozell & Jacobs, Inc., 126 Misc. 2d 95, 481 N.Y.S.2d 269 (N.Y. Sup. Ct. 1984).