Court will Uphold Liquidated Damages so long as Reasonable at the Time of Contracting

K-Con Building Sys., Inc. v. United States, 97 Fed. Cl. 14 (2011).

K-Con, a design-build contractor, entered into three separate contracts with the United States Coast Guard for the design and construction of pre-fabricated metal buildings in three cities. As it relates to the Elizabeth City contract, K-Con brought suit seeking to convert its termination for default into a termination for convenience and for recoupment of liquidated damages. K-Con moved for summary judgment on the grounds that the liquidated damages (“LDs”) assessed by the Government were arbitrary and inconsistent with the actual damages incurred.

Various delays over the course of the contract’s term, to include worldwide steel shortages, shipping delays and issues with defective specifications, resulted in K-Con’s inability to meet the extended contract completion date. The Government terminated K-Con for default and used the remaining funds under the contract in reprocurement.

K-Con argued at summary judgment that the LD rate of $551 per day was arbitrary because the other two contracts K-Con and the Government were involved in had different LD rates. K-Con also argued that the Government was not permitted to include personnel and administrative costs with the LDs.

Judge Sweeney held that the different rates used in the other contracts were irrelevant to the Elizabeth City contract rate. The court looks to the time of the contract’s execution to determine whether or not an LD provision is reasonable. The court will not enforce LD clauses intended as a penalty, but the purpose of these provisions is to “allocate the consequences of a breach before it occurs.” For this reason, the Court upheld the LDs in the Elizabeth City contract as reasonable because K-Con could not prove that at the time of contract execution the Government could not have reasonably expected to spend the LD amount as a result of the breaching party’s breach.

The Court also upheld the Government’s inclusion of administrative and personnel costs in the LDs. In so holding, the Court found that since a contractor can recover its overhead from the Government in LDs, the Government should likewise be able to recover the same when the contractor is in breach.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

Recent SC Case on Enforceability of Liquidated Damages

The South Carolina Court of Appeals in Erie Ins. Co. v. Winter Constr. Co., 393 S.C. 455, 713 S.E.2d 318 (Ct. App. 2011), held that the administrative burden provision in a Subcontract was enforceable.  The provision provided:

If SUBCONTRACTOR fails to cure an event of default within seventy-two (72) hours after receipt of written notice of default by WINTER to SUBCONTRACTOR, WINTER may, without prejudice to any of [its] other rights or remedies, terminate the employment of SUBCONTRACTOR and [ . . .] WINTER shall be entitled to charge all reasonable costs incurred in this regard (including attorney[‘s] fees) plus an allowance for administrative burden equal to fifteen percent (15%) to the account of SUBCONTRACTOR.           

The Subcontractor, Fountain Electric, agreed to each provision of the Subcontract and even initialed every page.  Fountain Electric defaulted and Erie, its surety, made a demand against Winter for payment of remaining contract balances.  Winter withheld $350,000 based on the administrative burden provision.

Erie filed suit against Winter for breach of contract.  Erie argued that the liquidated damages provision is an unenforceable penalty and that it was entitled to attorney’s fees.  The trial court granted Erie’s motion for summary judgment on the issue that the provision was unenforceable.

On appeal, the court reversed the trial court’s holding and determined that the provision was enforceable.  The appellate court based its analysis on the test set forth in Tate v. LeMaster, 231 S.C. 429, 441, 99 S.E.2d 39, 45-6 (1957):

Implicit in the meaning of ‘liquidated damages’ is the idea of compensation; in that of ‘penalty,’ the idea of punishment. Thus, where the sum stipulated is reasonably intended by the parties as the predetermined measure of compensation for actual damages that might be sustained by reason of nonperformance, the stipulation is for liquidated damages; and where the stipulation is not based upon actual damages in the contemplation of the parties, but is intended to provide punishment for breach of the contract, the sum stipulated is a penalty.

The court determined that the provision of the subcontract was clearly meant to compensate Winter for administrative costs in the event that Erie failed to complete the work on time.  The court held that it would be impossible to determine the actual and consequential damages resulting from a subcontractor default, so a liquidated damages provision was appropriate.  The sliding scale approach of the administrative burden clause was a “reasonable and fair liquidated damages provision.”  In light of both contract interpretation and public policy the court upheld the provision as enforceable.

This site and any information contained herein is for informational purposes only and should not be construed as legal advice.  Seek a competent attorney for advice on any legal matter.

Liquidated Damages Upheld Unless Extraordinarily Disproportionate

Weis Builders, Inc., 2010 ASBCA No. 56306, LEXIS 13 (Feb. 17, 2010).

The U.S. Army Corps of Engineers awarded Weis Builders, Inc. a design/build contract for family housing at Minot AFB in North Dakota valued at $350 million.  The liquidated damages provision of the contract and both disputed task orders stated that failure to complete the work on schedule would result in $2,400/day until the work was completed or accepted plus $35/day for each incomplete house.

Weis failed to complete both task orders on time, which resulted in a total $1.3 million in liquidated damages.  Weis argued that the provision was unenforceable because the government’s actual damages were less than $1.3 million and that the late turnover requirement was ambiguous. Both the contracting officer and the Armed Services Board of Appeals denied Weis’s claim.

Liquidated damages provisions will be upheld unless they are extraordinarily disproportionate to the actual damages suffered, thus penalizing the breaching party.  The difficulty lies in actually proving that the liquidated damages are extraordinarily disproportionate, especially in government contracts where it is hard to predict at the outset what damages the government will suffer if the contract is breached.

In this case, the liquidated damages were tied to reasonable estimates of the government’s predicted losses in the event that the construction was not completed on time.  $2,400/day was an adequate measure of the administrative costs and personnel costs that the government could have been expected to spend, and the $35/day was based on the need for housing military families in hotels until the construction was complete.  The Appeals Board also determined that the government need not prove the exact measure of calculation of liquidated damages so long as they were based on reasonable estimates.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice.  Seek a competent attorney for advice on any legal matter.