Construction contracts often include a liquidated damages clause which provides for the payment of a predetermined measure of damages in the event of a default by the contractor. In most circumstances, these clauses specify a daily sum that a contractor can be charged for each day the work remains unfinished beyond the date set for substantial completion.1 Though they are not always labeled as such, liquidated damages clauses also appear in a variety of other commercial contexts, including contracts for the sale of real property,2 commercial leases3 and alteration agreements between residents and co-op or condo boards.4 Given their potentially far-reaching consequences, it is important for both parties to a contract with a liquidated damages clause to understand when and how such a clause will be enforced under New York law.
Clauses, Generally
Liquidated damages clauses are generally valid under New York law, provided they meet certain criteria and do not amount to a penalty.5 Notably, contrary to common belief, there is no requirement that a corresponding bonus clause be included in the contract. “The law is well-settled that a liquidated damages clause will be upheld if (1) the amount fixed is a reasonable measure of the probable or actual loss in the event of breach, and (2) the actual loss suffered is difficult to determine precisely.”6 In determining the enforceability of a liquidated damages clause, “courts should consider the surrounding circumstances and the apprehension of damages that existed in the minds of the parties at the time the contract was made.”7 The burden is on the party seeking to avoid the liquidated damages clause to demonstrate that it constitutes an unenforceable penalty.8 Liquidated damages clauses will not be enforced where such enforcement would be unconscionable, such as when both parties are responsible for the breach.9
Construction Contracts
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.
For questions call 1-877-256-2472 or contact us at [email protected]
