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.

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