Liquidated damages clauses are typically included in construction contracts to cover damages that may be difficult to calculate. Although useful, these damages can add up quickly. These types of clauses were the subject of a recent Federal Court case in Pennsylvania. In that case, the court found the liquidated damages was unreasonable, as they were copied from previous, unrelated projects. Rather, liquidated damages should be calculated specifically for the project at hand.
Liquidated damages calculations
A liquidated damage clause is a provision in a contract that sets a predetermined dollar amount of damages that may be recovered in the event a party breaches the contract. These provisions are typically tied to a specific type of breach. In a construction contract, this usually is tied to delay damages, which are notoriously difficult to calculate.
To have an enforceable liquidated damages clause, the amount of damages must be a “reasonable forecast” of the potential damages the contracting party may incur for each day of delay. Even though these provisions can be agreed upon by the parties, they are usually enforced strictly to prevent unreasonable or excessive per diem rates.
This is exactly what the Federal Court in Pennsylvania concluded when analyzing a contract that had used the same liquidated damages amounts from a previous project. The court found their liquidated damages calculation unreasonable because they failed to base the potential damages on costs incurred on the specific project.
Pubic agency claims over $2.5M in liquidated damages
The case in question is D.A. Nolt, Inc. v. The Philadelphia Municipal Authority
Project Snapshot:
- Government Entity/Owner: Philadelphia Municipal Authority (PMA)
- General Contractor: D.A. Nolt, Inc. (Nolt)
The City of Philadelphia had plans to relocate the Police Department Headquarters. The Philadelphia Municipal Authority (PMA) was in charge of the project and hired D.A. Nolt, Inc. (Nolt) as the general contractor for the renovation phase. Shortly after Nolt began work, the project fell through and the Mayor relocated the future police headquarters elsewhere.
After the project was canceled, Nolt filed a lawsuit claiming damages of over $2.5M for unpaid work performed. In response to the lawsuit, PMA filed a counterclaim for breach of contract alleging that Nolt had delayed the project by 255 days.
PMA claimed $2.55M in damages pursuant to the liquidated damages provision contained in the contract. The clause in question provided for $10,000 per day in liquidated damages. Subsequently, Nolt filed a motion for partial summary judgment to dismiss the liquidated damages claim.
Liquidated damages unreasonable – not based on a “reasonable forecast”
The court in this case focused on the well-established rule of law in Pennsylvania, which states that a liquidated damages clause is enforceable if the amount fixed is a “reasonable forecast” of compensation for the harm caused by the breach.
During trial, the Project Director who finalized the contract went on record stating that the liquidated damages amounts were set because similar past City projects included $10K per day for liquidated damages. No calculations were made regarding the specific project in question. Therefore, the amount didn’t represent a “reasonable forecast” of the potential harm for breach.
PMA also argued that the $10K per day was reasonable because it had actually suffered almost $2.7M in damages due to the contractor’s delays. This, they argued, was justified as the total liquidated damages added up to around $2.55M.
The court rejected this argument, stating that the city’s “good or lucky guess cannot overcome its failure to reasonably forecast probable actual damages incurred as a result of a delay.” Therefore, the court granted Nolt’s motion for summary judgment and dismissed City’s claim for liquidated damages.
Review the liquidated damages provisions in your contract
Including a liquidated damages clause in a construction contract is incredibly useful. These are typically negotiated and inserted to avoid spending the time and money calculating the amount of actual damages. However, the keyword in that last sentence is “negotiated.” Don’t blindly sign a contract containing a liquidated damages provision without considering the consequences. Nolt was particularly lucky in this case. Had there been evidence introduced of some type of calculation or methodology used to reach that number, this case could have easily gone the other way.