It’s an unfortunate truth of large construction projects that conflicts arise. Deliveries meet delays or don’t conform to the agreed-upon terms, workers perform substandard work and subcontractors fail to come through like they promised. There’s a particular clause that might seem insignificant, but that can make a huge difference when you add it into your contracts before you accept a job.
What they do
A liquidated damages clause is a part of a contract that specifies a pre-determined amount of money that one party will pay to the other if they fail to uphold their end of the bargain. It’s not meant as a punishment for the breaching party. Rather, it’s an efficient and cost-effective way of compensating the non-breaching party for the consequences of the breach.
When negotiating the contract, both parties and their attorneys typically sit down and figure out a fair amount that would adequately compensate either party for a breach. That way, both parties can feel protected, knowing that they’ll be taken care of even if a breach occurs.
Saving time and money
If you don’t have a liquidated damages clause in your contract, and the other party breaches, then it’ll be up to a court to decide the amount that the other party owes you.
This means that there will have to be a costly and time-consuming lawsuit, filled with discovery, testimony and evidence, in order for the court to be able to determine a fair amount of damages to award.
You might be able to skip the whole lawsuit if you can invoke the liquidated damages clause as soon as the other party breaches. Even if the conflict does advance to a lawsuit, it will likely be much smoother than it otherwise would be, because your attorney will be able to present the contract that both parties agreed to into evidence.
That’s why, when your attorney is negotiating your contract with the other party, you should propose adding in a liquidated damages clause. The amount of time, money and headache it can save you is considerable.