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.

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