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Liquidated damages:

 

It is not uncommon for parties to agree to a liquidated-damages clause in a   construction contract. The general theme of such a provision is that if the   contractor does not complete construction within a certain number of days after   construction begins, the contractor will be liable to the owner for a certain   amount of money for each day beyond the contractual completion date. While there   may be other unreasonable things consenting adults may legally do in private,   one thing they cannot do is agree to unreasonable liquidated damages.

 

The general rule in Wisconsin is that a liquidated-damages clause is enforceable   only if the clause is reasonable under the totality of the circumstances. This   reasonableness test is supposed to prevent abuse by one party in exercising   its bargaining leverage. Wisconsin courts consider several factors in determining   whether a liquidated-damages clause is reasonable, including:

 

     
  • Whether the parties intended to estimate damages or intended to punish   one party.
     
     
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  • Whether, at the time the contract is signed, it is difficult or impossible   to accurately estimate the injuries caused by a delay in completion.
     
     
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  • Whether the stipulated damages are a reasonable forecast of future harm   caused by a delay in completion.
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In a May Wisconsin Court of Appeals decision, Cammarata v. Pheasant Run Partnership,   the court ruled that the liquidated-damages clause in a construction contract   was unreasonable and unenforceable. In that case, an owner entered into a contract   with the builder for the construction of a condominium. An addendum to the contract   contained a liquidated-damages clause that provided a $200 per day penalty against   the builder for a delay in the condominium’s completion. The condominium was   not completed on time, and the owners sued the builder seeking to enforce the   stipulated damages clause. The owners did not allege or seek to recover actual   damages. Considering the factors set forth above, the court concluded that the   liquidated damages were not a reasonable forecast of anticipated damages. The   parties’ deposition testimony established that the owners did not know where   the $200 was derived and, consequently, the figure did not represent an attempt   by the parties to reasonably forecast future damages. While the owners’ affidavits   stated that they had suffered actual damages because their home decreased in   value, there was nothing in those affidavits that indicated that the liquidated-damages   amount was based on that anticipated loss. Because the owners only sought the   amount of the liquidated damages and did not allege actual damage, the court   of appeals opined that the trial court properly granted the builder’s motion   for summary judgment and dismissed the case.

 

Here are some lessons that may be drawn from this case:

 

     
  • If you agree to a liquidated damages provision, it could come under scrutiny   later. You should not assume that it will be disregarded – or honored — by   the court.
     
     
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  • When drafting or negotiating a contact containing a liquidated-damages   provision, you should consider the "reasonableness" factors described   above.
     
     
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  • When a liquidated damage provision is used, other related provisions should   also be adequately addressed. For example, if the contract provides that the   contractor must achieve substantial completion within a certain amount of   days after construction begins, then the factors establishing the start date   (e.g., within a certain amount of days after the issuance of a building permit)   and the "substantial completion" date (e.g., upon the issuance of   an occupancy permit) should be clearly defined. The events establishing contract-time   extensions (e.g., acts of God, strikes, adverse weather condition and other   conditions beyond the reasonable control of the contractor) should be clearly   defined as well.
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Hal Karas can be reached at Michael Best & Friedrich LLP at 414-271-6560   or by email; Dereck R. Brower can be   reached at 262-956-6560 or by email.  

 

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