I have written many posts about the enforceability of liquidated damages clauses in construction contracts—a topic that interests many people in the construction industry.

Occasionally, you may see an owner argue that under a liquidated damages provision, the owner has the option to either assess liquidated damages for the late completion of a project or obtain its actual damages associated with a delay.

Recently, a federal court considered whether a liquidated damages clause gave a public owner the right to assess liquidated damages or obtain actual damages.

In Northeast Illinois Regional Commuter Railroad Corp. v. Judlau Contracting, Inc., a public owner entered into an agreement with a contractor for a $17.2 million railway project for the construction of 11 bridges and related work. The project was completed over two years late.

A city’s permit and review process caused at least part of the delays, and the contractor sought a time extension which the owner denied. The parties disputed who was responsible for the delayed completion of the project. The owner claimed the contractor was responsible for the entire delay and those delays caused the owner to incur damages.

The owner sought its actual damages for costs it incurred due to the delay. The owner withheld about $693,000 as liquidated damages. In turn, the contractor sought damages from the owner for late payments, including interest on those payments. In the end, the parties sued each other for breach of contract.

The contractor filed a motion for partial summary judgment and sought an order regarding the amount of damages that the owner could possibly recover from the contractor. The contractor argued that liquidated damages were the owner’s sole and exclusive remedy for delay. The owner contended that it was not limited to liquidated damages and could seek its actual damages associated with the delay.

The liquidated damages provision provided the following:

LIQUIDATED DAMAGES. Time is of the essence of this Contract. Should the Contractor neglect, refuse, or fail to complete the work under this Contract within the time agreed upon, and in view of the difficulty of estimating with exactness damages caused by such delay, Metra shall have the right to charge the Contractor the sum of $1,305.00 per day for each and every calendar day that such work under this contract is delayed in its completion beyond the specified time, as liquidated damages and not a penalty.

After considering the above language, the court noted that under Illinois law, which applied to the dispute, “provisions allowing a party the option between actual and liquidated damages are void and unenforceable.” The owner suggested that “there is some daylight between a right to collect liquidated damages, as opposed to an ‘option,’ or choice between liquidated or actual damages.” The court found that reasoning “unpersuasive on its face.”

The court also noted that “[t]he problem for [the owner] is the plain language of the contract here does not create an option between liquidated and actual damages.” Thus, the court held that as to the owner’s delay damages, it was limited to the liquidated damages daily rate specified in the contract.

The court also found that the owner’s damages were largely due to delay. As such, the court held that several categories of delay-related costs were limited to the liquidated damages to which the owner agreed

Bottom Line: If the owner wants the option to assess liquidated damages or actual damages if a project is untimely completed, the owner should expressly provide that in the contract. Even if such an option is expressly provided in the contract, however, an optional liquidated damages clause may be unenforceable under applicable law. That is an issue that should be considered before attempting to include an optional liquidated damages provision.

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