A recent case out of Pennsylvania refused to allow an owner to assess liquidated damages for project delay. This case serves as a reminder that if you are including liquidated damages in your construction contract, there must be some reasonable basis for the amount of liquidated damages.
In this case, D.A. Nolt v. The Phila. Mun. Auth., the City of Philadelphia sought to enforce a $10,000 per day liquidated damages provision. The general contractor challenged the demand for liquidated damages and took the deposition of the City’s project manager and project director. The project manager admitted that he did not perform any analysis to forecast the daily amount of liquidated damages for the project. The project director testified that back in the 1990’s, his department considered “some relative costs that it might incur” regarding prior large-scale projects “that had some detention components.” The project director also admitted he could not locate any documents detailing any analysis on which the liquidated damages were based.
Ultimately, the court refused to enforce liquidated damages against the general contractor because:
the City’s liquidated damages provision was not based on a reasonable forecast of probable costs and it was unreasonable for the City to rely on undocumented, amorphous recollections or casual re-constructions by persons without first-hand knowledge of prior analysis.
This case serves as a reminder that liquidated damages must be based on anticipated damage should the project be delayed. If you are simply using a plug number in your contracts, you are subject to the very real risk that a court will refuse to enforce liquidated damages.
If you are struggling with liquidated damage clauses, either in a contract you are drafting or one that you are reviewing for a project, we recommend you work with experienced construction counsel to assist you in this analysis.