Real Estate Law

Vandeventer Black LLP: Builders and Contractors Exchange - Liquidated Damages and Planning Ahead

By: Jerrell Williams

LAW TIPS

You've thought of everything.  You've considered all that could go wrong with the project. In fact, the owner or your subcontractor even agrees in the written contract that if certain circumstances occur that would result in a loss to you (for example, the project owner fails provide you with access to the property by a certain date), you will be paid a specific amount of money, or the contract price will be increased or the subcontract price will be decreased by a certain amount to cover your costs and losses.  This is a liquidated damages clause.

The appeal of a liquidated damages, or see it seems at first, is that you and the other party can avoid the expense of litigation if something goes wrong-you are identifying the solution before the problem arises.  Simple, right?

When is anything ever as simple as it seems?  Liquidated damages clauses can be challenged. In fact, you may find yourself on the side of wanting to challenge such a clause.  Some challenges upheld by Virginia courts include the assertions that: 1) the amount of liquidated damages actually constitute a penalty fee, 2) the amount of the liquidated damages is not a reasonable assessment of losses expected to be incurred, at the time the contract was made, or 3) the losses anticipated by liquidated damages clause were actually definite and measurable.

But you can increase the likelihood of surviving a challenge to your liquidated damages clause by including in the contract a clause by which the other party agrees to waive the right to challenge the validity and enforceability of the liquidated damages clause.  In Gordonsville Energy v. Va. Elec. & Power Co., 257 Va. 344, (1999) [enhanced version available to lexis.com subscribers], the Virginia Supreme Court upheld just such a waiver of rights clause.  Of course, almost anything can be challenged and it would be wise to have an attorney review any contract that you are considering signing.

Authored by attorneys, these articles are meant to bring awareness to these topics and are not intended to be used as legal advice. For more information, contact Mike Sterling at 757-446-8626 or Bill Franczek at 757-446-8600.  Visit www .vanblk.com , for our library of Construction Law Tips.  Suggestions for a topic? E-mail bfranczek@vanblk.com.

 

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