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Construction law-liquidated damages.

Construction contracts may call for "liquidated damages" in the event of a delay in completion. Such provisions will be enforced where the performance under the contract has not been completed on time. Arkansas Courts have ruled that where a construction contract is substantially performed within the time limit, delay in completion of minor details which does not cause material damage to the project will not subject the builder to liquidated damages. Whether the project is substantially performed is a question of fact to be determined by the judge or jury.

The Arkansas general rule pertaining to liquidated damages is that an agreement for liquidated damages in advance of the breach of contract will be enforced if the amount is

(1) a reasonable forecast of just compensation for the injury, or,

(2) if harm is difficult or incapable of accurate estimation. Most delay damages in construction cases can be accurately estimated. Therefore, liquidated damages should be a reasonable estimate of actual damages.

The mere fact that the term "liquidated damages" is uses in the contract is not controlling to determine whether the claim is for liquidated damages or penalty. Penalties are unenforceable even if labeled with a different name like "liquidated damages." It is necessary to analyze the terms in light of their legal meaning and practical application. Federal Courts applying Arkansas law have stated that a damage provision was an unenforceable penalty because, the "liquidated damage" clause was not the subject of negotiation between the parties; and did not appear to be a bona fide attempt by both contracting parties to agree in advance on a reasonable forecast of just compensation for any harm which would be caused by a delay in performance.

Liquidated damage clauses should be negotiated between the parties. The amount and basis for the amount should be defined in the bid documents.

The dollar amount should always be a reasonable amount. Calculations of projected actual damages caused by delays should be made and documented in the owner's/architect's/engineer's/general contractor's file. The method of calculation may include:

(1) construction loan interest charges;

(2) lost income; or

(3) rental expense for comparable facilities, converted to a daily charge.

The contract documents should disclose the method of calculation so that both parties acknowledge the reasonableness of the amount.

When considering liquidated damages clauses be careful to document the reasonableness of the amount and obtain the other parties' agreement to the amount.

DAVIDSON LAW FIRM Cantrell at State Little Rock, Arkansas 72203 374-9977

Charles Darwin "Skip" Davidson
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Author:Darwin, Charles
Publication:Arkansas Business
Date:Dec 11, 2006
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