In construction contracts, liquidated damages clauses are a common way for a project owner/developer to protect against delays in completion by the contractor. In their basic form, such clauses typically provide that for each day of delay beyond the contractually mandated completion date, the contractor will pay to the owner a stipulated, or “liquidated,” sum in lieu of actual damages. These clauses are favored by owners as seemingly providing guaranteed financial protection for delayed completion by eliminating the challenges involved in recovering actual damages, such as financing costs, lost rent or lost sales opportunities. Not only can these costs be difficult to prove, but they also may be unrecoverable in litigation as speculative or not foreseeable at the time the contract was entered. However, while liquidated damages clauses might on the surface seem simple and ironclad—after all, what could be difficult about counting the days the contractor was late—they are fraught with pitfalls and their assumed protection can be elusive.
Exclusive Remedy
One potential pitfall is the “belt and suspenders” approach of contract drafting, i.e., providing for both actual and liquidated damages. While in many cases providing for duplicative protections might be prudent, this is not one of them. Liquidated damages are intended to take the place of actual damages as a reasonable estimation when actual damages would be potentially difficult to calculate,1 and thus are an exclusive remedy which must be used in lieu of, and not in addition to, actual damages.2
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