What are liquidated damages?

| Jun 21, 2021 | Business Disputes |

Some Pennsylvania construction contracts include clauses calling for liquidated damages. These are monetary amounts that must be paid if a party breaches the contract. They are meant to specify how much a party might have to pay for certain types of losses that might be difficult to quantify. They are not meant to be punitive and should be thoroughly assessed before a contract is signed.

Liquidated damages clauses in construction contracts

Construction contracts commonly include liquidated damages clauses. Owners include these types of clauses to prevent damages when the projects’ completions are delayed past the date called for in the contracts. In most cases, the owners will include liquidated damages clauses in the contracts they have with the general contractors. The general contractors might also include similar liquidated damages clauses in the contracts they have with the subcontractors performing work on the project to pass them along.

Enforceability of liquidated damages clauses

For a liquidated damages clause to be enforceable, the damages from a potential breach must be difficult to determine at the time the parties signed the contract. The liquidated damages to which the parties agreed must also be reasonable in relation to the damages that might be caused by a delay. Courts might refuse to enforce a liquidated damages clause if they find that the amounts are disproportionately high in relation to what was affected by the breach.

Before signing a construction contract that calls for liquidated damages, it might be a good idea to have an attorney review the contract and negotiate the clause on your behalf. This might help to protect your rights to recover liquidated damages in the event of a contract breach. If you are accused of breaching a contract that contains such a provision, an attorney might be able to convince the court that it should not be enforced.