Liquidated damages provisions are commonplace in construction contracts. A single would believe that offered the powerful Texas community coverage favoring freedom of contract, bargained for liquidated damages would be effortlessly enforceable in litigation. But Texas regulation on this difficulty is counterintuitive and can render a liquidated damages provision unenforceable if not cautiously drafted. And even when enforceable, liquidated damages provisions can lead to unintended implications for owners and contactors alike. This site put up offers drafting guidelines on how to stay clear of these lawful pitfalls and draft liquidated damages provisions that carry out the wanted end result.
The Texas Lawful Regular for the Enforceability of Liquidated Damages
A common liquidated damages provision provides for a negotiated or “liquidated” amount of damages in the celebration of a long run breach of agreement. In design contracts, liquidated damages are normally used for: (1) delays to completion of the undertaking (generally referred to as “delay liquidated damages”), and (2) on industrial EPC initiatives for failure to reach specified efficiency ensures (normally referred to as “performance liquidated damages”). But enforcing a liquidated damages provision is tough, mainly because as the bash asserting liquidated damages (ordinarily the Proprietor), you would require to demonstrate at the time the liquidated damages provision was drafted that:
(1) “the damage caused by the breach is incapable or tricky of estimation” and
(2) “the amount of liquidated damages named for is a fair forecast of just compensation.”
Atrium Med. Ctr, LP v. Houston Purple C LLC, 595 S.W.3d 188, 192 (Tex. 2020). If the occasion asserting liquidated damages fulfills this burden, the get together opposing liquidated damages (typically the Contractor) can defeat the liquidated damages provision by presenting proof that there is an “unbridgeable discrepancy” among the true damages and liquidated damages (i.e., that the precise damages would be noticeably significantly less than the liquidated damages).
Recommendations for Drafting Enforceable Liquidated Damages Provisions
The Texas legal regular for implementing liquidated damages is rather contradictory. A single first needs to present that the genuine damages are “difficult to estimate,” but also that the liquidated damages had been a affordable forecast of individuals “difficult to estimate” true damages. Underneath are some drafting and negotiating ideas that may well aid thread this needle and give you improved arguments for enforceability.
- Clarify specifically why actual damages for the breach are difficult to estimate in the liquidated damages provision by itself. For instance, on a professional workplace job, note that it is challenging to estimate shed rental cash flow in progress.
- Document how you appear up with the liquidated damages amounts at the time you are drafting and negotiating the provision. For instance, estimate further Owner supervision costs, development bank loan costs, and shed rental earnings that would likely be incurred in the celebration of a delay, use that data to come up with a day-to-day liquidated damages fee, and create down how you did that. Having these types of contemporaneous documentation will be pretty useful if there is a dispute.
- If there is a consequential damages waiver in the contract, exclude liquidated damages from it. With these a waiver, the party opposing liquidated damages may perhaps be equipped to argue that consequential damages (these types of as lost earnings on other contracts) can’t be considered in coming up with a affordable forecast of payment for the reason that these kinds of damages have been waived. Texas courts have not dealt with this situation, leaving home for argument on both of those sides.
- Really don’t
- Just recite in the liquidated damages provision that “the damage brought on by the breach is tricky of estimation” without outlining why.
- Just plug in liquidated damages amounts made use of on earlier jobs even if the identical functions were being involved. In the celebration of a dispute, testimony that “we just copied and pasted the LD amounts from the past undertaking we did” or “we often use that amount of money in our contracts” will be unhelpful to a occasion hoping to enforce a liquidated damages provision.
- Describe the liquidated damages as a “penalty” when negotiating the provision. Even worse however, place the phrase “penalty” in the liquidated destruction provision itself. Texas courts will refuse to implement a liquidated damages provision if the court concludes it is a penalty and not a realistic forecast of opportunity damages at the time the provision was drafted. Calling the liquidated damages provision a penalty will make it less difficult for a court docket to conclude it is.
Other Liquidated Damages Complications to Steer clear of
1. Location the liquidated damages cap too reduced (or not having a cap at all).
Caps on the complete quantity of liquidated damages are frequent in design contracts and make perception as a industrial determination to allocate risk. From the contractor’s perspective, omitting a cap on liquidated damages can leave the contractor uncovered to major danger. But although a cap on liquidated damages is realistic and market, liquidated damages capped at the contractor’s price or at way too modest a portion of the charge may not sufficiently compensate the proprietor for delays or inspire the contractor to end on time. And if the contractor hits the liquidated damages cap just before the task is concluded, there is lessened incentive for the contractor to mitigate delays. A person possibility to mitigate this problem is to negotiate for a lesser per-day liquidated damages sum but a greater cap.
2. Creating liquidated damages the “exclusive” remedy for delays.
Liquidated damages provisions are generally published to be the only damages accessible for hold off or for failure to satisfy efficiency assures. But if the clause goes further more and helps make the liquidated damages the exceptional “remedy,” it can make it harder for the owner to terminate the contractor for trigger or training other therapies if the job is delayed. Consequently, contractors could want to negotiate for “exclusive remedy” language in liquidated damages provisions to restrict their hazard if the venture is drastically delayed.
3. General performance liquidated damages that really do not tackle the condition exactly where the facility is a complete failure.
In idea, functionality liquidated damages on industrial assignments must compensate the Proprietor if the venture fails to pass the general performance exams. But somewhat than the job simply performing at a minimized capability, what if the challenge totally fails to produce a sellable product or service? In these kinds of cases, performance liquidated damages hardly ever appear close to compensating the owner for its true losses. Homeowners need to take into account negotiating for a least threshold that facility effectiveness should satisfy for effectiveness liquidated damages to utilize, and for the owner’s capability to recover genuine damages if the facility does not satisfy the minimum performance threshold.