The Liquidated Damages Clause—When is it just a Penalty?

The Liquidated Damages Clause—When is it just a Penalty?

By Sarita Smithee

Construction contracts often contain a liquidated damage clause that provides for payment a stipulated amount in the event that work is not completed within a specified period. Owners often impose these clauses against contractors to ensure the timely performance by penalizing the contractor if the work is not completed on time.

Purpose of Liquidated Damages Clauses

Construction contracts include liquidated damages clauses for project delays because damages caused by delays are often difficult to foresee. Liquidated damages may be assessed by owners for failure to timely complete a project, or, less commonly, they may be claimed by contractors when owner delays increase the costs of project completion.

Typically, a liquidated damages clause specifies an amount per day that the owner is entitled to recover in damages if the contractor fails to complete the project by the contracted completion date. The term “liquidated” is used to signify the agreed amount of damages an owner will recover in the event of a delay, and eliminates what can be a lengthy and expensive process of proving the actual damages.

However, the inclusion of a liquidated damages clause does not always mean that provision is enforceable. Although competent parties generally have the right to make their own bargains, this right is not unlimited.

The enforceability of a liquidated damages clause depends on multiple factors

Generally, a liquidated damages clause will be be upheld if it was created by the parties in an attempt to estimate, in advance, the actual damages that would be suffered in the event of a material breach. However, if the only rationale for enforcement of the clause is that the project was not completed on time, the Court will likely view the clause as a penalty and unenforceable if it is challenged, absent some other evidence that late completion caused actual damages.

In evaluating whether a liquidated damages clause is enforceable, Texas courts have generally looked to the following factors:

  • Whether the amount stipulated in the contract was a reasonable forecast, at the time the parties contracted, of just compensation for the harm that is caused by the breach;
  • Whether the harm that was caused by the breach is one that is incapable or very difficult of accurately estimating;
  • Whether the amount of liquidated damages to be assessed was disproportionate to the amount of actual damages incurred;
  • Whether the liquidated damage provision applies equally to both material and minor breaches; and
  • Whether the liquidated damage provision was not intended to provide fair compensation for the breach but instead to secure timely performance of the contract.

Drafting considerations

Owners may attempt to address these factors by specifically drafting the liquidated damage clause to state that it is not intended to be a penalty. If the clause was negotiated by the parties, as opposed to boilerplate language inserted by the owner, this language can help the owner prove the parties’ intent.

If an owner uses the same amount for liquidated damages in all of its contracts, courts will often find that the provision was intended as a penalty and, therefore, unenforceable. The liquidated damage provision therefore should be tailored to the particular contract.  Similarly, if the same amount of liquidated damages will be triggered by either a material or minor breach, courts have held that the liquidated damage provision is unenforceable even if there has been a material breach.

A party who is seeking to craft a liquidated damage provision that would be upheld by the Texas courts should consider a pre-contract analysis as to what the potential damages could be if the work were not completed on time, and should  document it in the file.

Provisions should be crafted so that they do not apply equally to both a minor and material breach. A liquidated damage provision that applies equally to “the failure to perform any obligation required by the contract” should be avoided.

As noted above, the inclusion of liquidated damages clauses is commonplace in construction contracts. Knowing what is required for those clauses to be enforced is useful information for either party to a construction contract, whether attempting to enforce a liquidated damages clause or trying to defeat its enforcement.

Sarita Smithee is an associate with The Beckham Group in Dallas, Texas.  The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant.  The firm drafts and prosecutes/defends civil cases involving numerous types of contracts, and has just about seen it all.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.


Construction Project Management for the Not So Smart!

Construction Project Management for the Not So Smart!

Construction Project Management for the Not So Smart!

4 Steps to Successful Construction Project Management

By William Goodman

Because of the ever-growing array of huge, complex and technically challenging projects in today’s world, project management has become a critical skill. People need special tools, techniques and knowledge to handle their project management assignments, such as confirming a project’s justification, developing project objectives and schedules, maintaining commitment for a project, holding people accountable, and avoiding common pitfalls.

Having or obtaining these critical skills may be somewhat overwhelming and intimidating. However, by following a few basic and simple steps a manager can avoid getting tangled up with the technical challenges and pitfalls that inherently come with being in this position.

It’s no secret that following a simple rule called KISS can be good philosophy to have: Keep It Simple Stupid. But, here are some additional steps to take to avoid traps and challenges:

1. Know Your Contract.

You must know the contract: what it says, the objectives, the contractors’, owners;/clients’ and architect’s responsibilities, , the deliverables, milestones, the common terms, etc.  Be sure to highlight and tab the essential parts of the contract that require action for quick reference later.

By understanding the contract, you can manage assignments and project justification. Prepare a matrix to track the assignments and who is responsible for each task or action required.

2. Communicate, Communicate, Communicate.

The manager must be able to communicate whether in writing or verbally. According to Dale Carnegie, author of How to Win Friends and Influence People, 85% of success on the job is due to one’s ability to lead people and personality. Only 15% of success is due to one’s technical knowledge. Therefore, the ability to communicate with people is vital and essential in increasing your success tremendously. It takes time to develop good communication skills and a good part of that development requires you to be a good listener. You should be listening two times more than speaking.

Try to avoid these kinds of pitfalls when communicating: expressing your feelings, making it personal, guessing or making assumptions. These types of emotions do not go over well in the business world, let alone in construction. Stick to the topic and facts. Be proactive – not reactive. Always maintain your composure and confidence. And, always be ready for that unexpected curve ball that undoubtedly will come at some point in time, but do not waiver or overreact to these types of situations.

3. Be Prepared.

One of the more important and time consuming tasks that a manager is responsible for is preparing and administering project meetings. Plan to start preparing for a scheduled meeting – whether it’s a conference call or in-person – at least a week in advance.

First, start by drafting the meeting agenda. Then, gather and assemble supportive documentation and exhibits that will be reviewed at the meeting. Be sure that all participants have confirmed or accepted the meeting request or invite.  If applicable, send out the meeting agenda and attachment to the participants a day in advanced.

Finally, when it comes time for the meeting, allow for some interaction and light conversation between all attendees. Most importantly, be prepared and anticipate the unexpected.

4. Keep Things In Proper Perspective.

You must be able to adapt to an array of personalities and the unexpected. Therefore, you need to be flexible with your management style so that you can make adjustments to achieve your goals and end results. Do not take yourself too seriously. Instead, strive to balance seriousness and light humor. This is something you are more apt to figure out through real-life experiences.

William Goodman, Senior Project  Manager for Triune, is a highly accomplished multi-talented project  manager with over 30 years of construction experience. He encompasses excellent skills in preparing schedules and managing job costs, budgeting, contract negotiation, Design Build, and pre-construction services.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune).  Any and all rights reserved.


Litigate Versus Arbitrate in Construction Contracts

Litigate Versus Arbitrate in Construction Contracts

Litigate Versus Arbitrate in Construction Contracts

To Bind or Not To Bind, That Is the Question

By Robert Wolf

“I just heard that my favorite baseball player was awarded $15 million in arbitration from his team.  THAT is what I am looking for.”

When clients talk about wanting arbitration, it typically stems from watching a little too much SportsCenter on ESPN.  Unfortunately, most arbitrations are not as simple or exciting as the arbitration proceedings we hear about on sports channels.

In fact, in many situations, arbitration can be a BAD CHOICE FOR CLIENTS.

What’s the Big Difference?


Generally speaking, arbitration (or an arbitration “hearing”) is a procedure where the parties actually have a trial, but instead of being in front of a jury, they are in front of a panel of 1-3 lawyers or former judges.  There is no jury, and the panel of 1-3 individuals decides the outcome of the case based on the evidence presented.

Once a decision is reached, that decision is binding.  While one can appeal an arbitration decision, they are rarely overturned unless the arbitrator is found to have some type of undisclosed conflict of interest or some other unfair bias.


Mediation is a different type of dispute-resolution procedure.  Mediation is NOT a trial.  The parties in a lawsuit start the day by sitting around a large conference room table, with each side puffing their legal chest, explaining why their side is the side of truth and justice.  The mediator is the referee, and usually keeps things from getting too out of hand.  This mediator is impartial and has no stake in the outcome, since the mediator receives a pre-set hourly rate or flat rate for his or her services.

After the opening comments/chest-puffing, the parties split into separate rooms, and the mediator goes room to room analyzing the strengths and weaknesses of the case.  The mediator then gives an opinion as to what a judge or jury might decide if the case actually goes to trial.

No one can force you to do anything at a mediation, except to show up in good faith and try to get the case resolved.  If you do not like the offer made by the opposing party or the demand made of you, then at the end of the day of mediation, you can just go home.  Nothing has been decided for you, and your case continues.

What is Right for My Business?

The answer to this question is often issue-specific.  Ask yourself if you would rather have a jury or a panel of lawyers and/or former judges deciding your case.  Jurors are always told to check emotion at the door when they walk into a courtroom, but they are only human.

If your issue is one for which you want to avoid the emotions of twelve people who do not know a lot about you or your company, then arbitration is a potential for you.  Keep in mind, though, that arbitration is still expensive – you still go through the process of taking depositions, exchanging documents, and arguing about evidence before the arbitration hearing itself.

I have seen many companies choose arbitration, as opposed to trial (or requiring a mediation), when handling subcontractor agreements.  Sometimes companies are afraid that a jury might side with the “little guy” when a general contractor tries to enforce certain provisions in the subcontract agreement.  Therefore, arbitration might make more sense in that situation.

Discuss your goals with an attorney before you decide whether to require the other party of the contract to go to arbitration, or before you sign a contract waiving your rights to a jury trial.  Always make sure you understand the advantages and disadvantages of each, and determine what is right for you.

Remember, the question of arbitration or trial (and mediation before trial) is a lot more complicated than whether a sports team or a sports player has the winning salary idea for a baseball player.

Robert Wolf is a senior associate with The Beckham Group in Dallas, Texas.  The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant.  The firm drafts and prosecutes/defends civil cases involving numerous types of contracts.

Vince Fudzie – The Blogger Reality Bite:

For years I felt that arbitration was the best way to avoid costly litigation; therefore, we included an arbitration clause in our subcontracts.  However, after being a defendant in a couple of frivolous lawsuits, I am not longer a fan of the arbitration process for a few reasons.

1.  There is not much control over how much the arbitrator can charge the parties for his/her services, which can sometimes overshadow the most costly law firms.

2.  The arbitrator often doesn’t have a clue about how our industry works.

3. Arbitrators often try to “split the baby down the middle” instead of making a soundly supported decision.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune).  Any and all rights reserved.