Level With Me By JeremyWyatt
Liquidated Damages: One Contract Clause That Can Ruin Your Company
Unfortunately, liquidated damages clauses have become all too common, even in situations where they simply have no business being used. Even worse , many modern subcontracts include liquidated damages clauses that can “share” the liquidated damages amongst all subcontractors, regardless of whether a particular subcontractor caused any delay on the project. Beware any subcontract clause that reads like this one: “If the Prime Contract provides for liquidated damages, and the Owner assesses liquidated damages against the General Contractor, then the Subcontractor shall be responsible for its proportionate share of those liquidated damages.” I call this a “Broad Form Liquidated Damages Clause.” I can tell you the way such a clause is regularly used: If there are four subcontractors, each of those four subcontractors is assessed an equal portion of any liquidated damages, regardless of whether all four (or none of the four) actually caused project delay! The general contractor may also
Here’s a sad but true story: A subcontractor goes out of business because of a single subcontract clause. In this story, the subcontractor signed a contract for a large commercial project, one that was maybe a little too big for the company. But this subcontractor was at the top of its game, and it completed its project work within the allotted time, within budget (except for some agreed change orders), and without any significant rework. Nevertheless, at the end of the project, this subcontractor got a back charge equal to roughly 40% of the subcontract value. The resulting dispute and cash-flow problems sent the subcontractor into bankruptcy. How did this happen? The answer is a single contract clause providing for “liquidated damages.” So what are liquidated damages? In the construction industry, liquidated damages typically are an agreed amount of damages paid on a per-day (or week or month) basis if a project (or a portion thereof) finishes late. In some situations, liquidated damages can be a fair result. For example, if a contractor promises to build a hotel in Ocean City in time for the summer beach season, it makes sense that the general contractor could be liable to pay liquidated damages if the hotel is finished late, because the owner does not have the benefit of using it during the summer season when it makes its profit.
“eat” a portion of the liquidated damages.
That’s fundamentally unfair, right? So, what can you do to avoid that unfairness?
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