An image of a typical construction site with construction workers, scaffolding, and a truck, representing all of the moving parts that can lead to delays in construction that may be addressed by clauses for liquidated damages in construction contracts.

Liquidated Damages in Construction Contracts: The Breakdown

Construction contract clauses present unique challenges to Indiana property owners, contractors, architects, builders, vendors, engineers, subcontractors, and construction law attorneys alike. Parties to a construction contract must understand the nuances of both contract and construction laws in Indiana, all while trying to anticipate anything and everything that could potentially go wrong. This is where liquidated damages in construction contracts come into play.

Carefully crafted construction contract clauses on liquidated damages can make all the difference in avoiding protracted litigation or the limiting the cost of proving damages. With liquidated damages, parties can enter into contracts with a sense of predictability, knowing what will happen in case of a breach, because the process will be governed by the contract terms and the construction laws in Indiana.

Liquidated Damages in Construction Contracts: What They Are and What They Are Not

To understand construction contract clauses for liquidated damages, it is easiest to first understand what they are not:

  • True liquidated damages clauses are not punitive damages clauses for construction delays or non-performance. They are not unenforceable penalties. Rather, liquidated damages clauses are meant to bring the non-breaching party to as near a “whole” position as possible, as though the breach of contract never occurred; and
  • Construction contract clauses for liquidated damages are also not meant to act as an alternative provision in a contract—they do not act as an “if part A of this contract does not work, then the alternative remedy will be under this liquidated damage clause instead.” If parties want alternative provisions in a contract, they can spell them out elsewhere in the contract, not in a true liquidated damages clause.

The main purpose of including a clause for liquidated damages in construction contracts is that the parties agree ahead of time on a method to calculate damages that could not be exactly figured at the time the contract was made.

The Building Blocks to Enforceable Construction Contract Clauses

Liquidated damages are not unique to construction contracts. A 2004 Indiana Supreme Court case involving a cable services contract, Time Warner Entertainment Co. v. Whiteman, summarizes some of the requirements for enforceable liquidated damages clauses:

  • The intention of the parties is proper, and the damages stipulation is reasonable;
  • The damages covered by the liquidated damages clause “would have been difficult to ascertain” (because if they had been ascertainable, they could have been addressed directly in a contract); and
  • The liquidated damages are not disproportionate to the loss caused by the breach (because disproportionate damages are effectively a “penalty”).

The general provisions of liquidated damages clauses are also addressed in Uniform Commercial Code § 2-718, which further clarifies that the amount, often figured by formula, must be “reasonable in the light of the anticipated or actual harm caused by the breach.” Courts make much of this distinction, with the majority of courts finding that reasonableness should be measured at the front end of the contract, when the contract is entered into.

Triggers for Liquidated Damages in Construction Contracts

Construction contract clauses for liquidated damages are triggered by some sort of breach, which frequently include construction delays—the failure to finish the construction on time. Construction contracts therefore need to identify at what point there is substantial completion of the contract under construction laws in Indiana.

Substantial completion is generally the stage of the process in which an owner gains possession and can occupy the building or have the beneficial use of it. When the stipulated deadline for substantial completion is not met, the liquidated damages clauses are triggered.

Liquidated damages can also be triggered by pre-determined milestone points established in the contract. Again, if these are delayed, the liquidated damages clauses can be utilized. Delay damages might be determined, for example, by using the fair rental value of the use of the building for the period that the aggrieved party was deprived of its use.

Constructing Sturdy Liquidated Damages Clauses Takes Effort

Liquidated damages clauses are meant to remove the need for litigation by pre-determining, to the extent possible, the damages in case of a breach of contract or failure to reach substantial completion within the agreed-upon timeframe. To avoid litigation of construction contract clauses for liquidated damages, however, there are a few things to remember:

  • Be sure that the liquidated damages have some reasonable relation, or link, to the anticipated damages or to the actual damages;
  • Be careful not to intend a clause as punishment, which is not a proper goal of liquidated damages—if the damages are unreasonably large, they may be considered unenforceable as a penalty and, therefore, against public policy;
  • Avoid making a liquidated damages clause too one-sided (again, for public policy reasons);
  • Be clear if you do or do not intend the provision to be the sole remedy; and
  • Refrain from making the damages too low in amount, or they may be viewed as an attempt to limit liability.

Remember All of Your Obligations and Seek Resources and Help

As careful as parties might be with liquidated damages in construction contracts, they must also be careful to remember all of the notice requirements of the construction contract, too. Under Indiana right to cure statute, once a homeowner notifies the construction professional of a construction defect, the construction professional has a certain amount of time to propose repairs or offer to pay to resolve the defect. This is also known as a right to cure for construction delays.

If the homeowner unreasonably refuses the proposal, thus denying the contractor the right to cure for construction delays or other problems, the construction professional may be able to recover attorney fees and the costs of defending the lawsuit. Homeowners must remember to exercise the right to cure for construction delays and defects by giving notice when potential construction contract disputes arise, and construction professionals must remember to respond as required by Indiana construction law.

Corey Meridew of Camden & Meridew, PC, is well-versed in construction laws in Indiana and can assist you in crafting, interpreting, or managing clauses for liquidated damages in construction contracts. Call Corey at 317-770-0000 or complete the firm’s online contact form to start the conversation.