Do your construction contracts contain a liquidated damages clause? Is the liquidated damages clause enforceable? These are questions you need to ask each time you review or draft a construction contract.
Liquidated damages clauses are enforceable under Nebraska law. But, if a court determines that the liquidated damages clause is a penalty, it will not be enforced. And, anyone opposing a liquidated damages clause will most certainly claim that it is really a penalty and should not be enforced.
Whether you are reviewing or drafting a liquidated damages clause, the first question you should consider is if you should include liquidated damages clause in your contract at all. Liquidated damages clauses should be included only when the damages you may suffer in the event of a breach will be very difficult to calculate. One example is damage for delay. While the true cost of a delay can be very difficult to calculate, a reasonable estimate of anticipated costs of the delay could be used in the liquidated damages clause.
Of course, this brings up the next question—what is a reasonable amount for liquidated damages. You will have to look closely at the project and decide what your damages will be if the project is delayed or terminated. Keep in mind that if your liquidated damages are out of line with your actual damages, the court will consider it a penalty and will not enforce it.
Often times, especially in complex construction projects, a sliding scale may provide the best option for a liquidated damages clause. For example, a liquidated damages provision that allows for all costs to date, plus an allowance for the administrative burden equal to a percentage of the unperformed work, allows for some flexibility and is reasonably related to your potential damages.
Drafting liquidated damages clauses can be tricky. And, if you do not do draft it correctly; the court will not enforce it. This does not mean your claim is lost. But you will have to prove your damages to the court and this can be time consuming, expensive and is often times very difficult.
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