By: Thomas S. Tripodianos Published: June 2005

Liquidated Damages

Question. What are liquidated damages?

Liquidated damages are a creature of contract, and are sometimes used when the exact amount of actual damages will be difficult to ascertain in the event of a breach. Liquidated damages clauses usually pertain to damages for failure to adhere to a contract schedule. Such liquidated damages are agreed to be a reasonable pre-estimate of damages a party will incur, as a result of delayed completion of work. Where liquidated damages run in favor of the Owner, they presuppose that

1. the Owner is entitled to full and beneficial occupancy and use of the completed work following expiration of the contract time; and
2. if the Contractor fails to complete substantially any portion of the work within the contract time, the Owner will sustain extensive damages and serious loss, as a result of such failure.

Liquidated damages are usually expressed in the form of a per diem amount, and are meant to fairly compensate the party assessing liquidated damages, and not to penalize the breaching party.

It may be preferable for contractors to liquidate the owner's damages for delay, when a contractor fails to reach substantial completion by the completion date. If a valid liquidated damages provision is not established in the contract, the contractor may be liable for the owner's actual damages. In a commercial or industrial situation, the owner's actual damages could have been far in excess of what a contractor can economically absorb. Reasonable liquidated damages remain a better alternative than unspecified actual damages. Obviously, low liquidated damages are to the advantage of the contractor.

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