Can You Get Liquidated Damages and Also Actual Damages On Account Of Delay?
Liquidated damages (LD’s) are pre-determined damages which the parties agree must be paid in the event of a specified breach. They are intended to approximate what the actual damages might be and therefore avoid the need to have to prove the actual costs if the breach ever occurs. In the construction setting, they most typically exist in the realm of delays. In other words, a construction contract will often provide that in the event of delayed completion, the contractor will pay, say, $2,000 per day for every day it is late.
Because LD’s are intended to approximate the actual damages an owner would incur in the event of a delay, the conventional wisdom has been that they encompass all delay-related damages and that “actual damages” are no longer obtainable where LD’s have been established. But that is not always the case.
In the recent case of Framan Mechanical Inc. v. Dormitory Authority of the State of New York, the contractor (Framan) entered into a contract with DASNY wherein it provided a performance bond from Arch Insurance, and agreed to pay DASNY $2,000 per day, as LD’s, “for loss of beneficial use of the Work” due to delay in the substantial completion of the project. When the job ran late, DASNY asserted a claim against Framan and Arch for not only the $2,000 per day (for 264 days, or $528,000) but also sought actual damages for extended design and construction management fees totaling $613,000. Arch moved to dismiss the actual damages claim, arguing that LD’s are intended to supplant the actual damages.
The court agreed that in general, LD’s are usually intended to subsume any and all actual delays damages. However, it concluded that where the LD provision covers only “loss of beneficial use,” the door has been left open for actual damages sustained due to the delay, other than for the loss of beneficial use. One form of damage did not supplant the other. And since there was no duplication of damages, the court held, Arch’s motion to dismiss the claim for actual damages must be denied.
The takeaway is that if you are looking to avoid having to pay both LD’s and actual damages, you must provide in your contract that the LD’s are the “exclusive remedy for damages on account of delay.” Without that express limitation, you could be subject to both.