Credit cards typically apply interest to late payments. This interest factor, which may be 18 percent or more, can be viewed as a form of liquidated damages (LDs). The base amount owed is not liquidated, because it depends on your balance, but the percentage is liquidated, or fixed, by agreement. Similarly, utility bills might have a provision for a bump-up in what must be paid after a certain number of days following the invoice date. We have grown to accept these penalties as the norm. In both of these instances, the amount is supposed to compensate the payee for what might be its “actual” damages. 


In construction contracts, it is common for an owner to insert a clause requiring payment of a fixed amount per day for delays. Generally speaking, these LD clauses are legal and enforceable, with some limitations. Problems arise when courts are asked to interpret an LD clause, particularly where there are other clauses concerning damages in the contract. 


For example, an LD amount for delays must be based on an owner’s reasonable projection of what its monetary damages may be if the job runs late. This projection may include such items as extended rental costs of an owner’s current location while it waits to move into the new building you are constructing. Also, the owner may want its LDs to cover extended insurance costs, site security, an architect’s supervision billings, etc. As such, the LDs are not viewed as a penalty but as compensation of a sort.


There are cases where an LD clause was held not to apply to all types of delays, allowing the owner to seek recovery of its actual damages because another contract clause seems to conflict with it. 


One such case arose out of steel deliveries, but the decision could be applied equally to electrical equipment, conduit and wire. 


In Merrill Iron & Steel Inc. v. Blaine Construction (W.D. Pa. 2016), it was determined that some of the steel sent to the job by Merrill did not meet tolerances. While this issue was being addressed and fixes proposed, the job began to run late. In court, Blaine sought to recover two types of damages: 1) the cost of repairing/replacing some of the steel and 2) delay damages incurred during the repair/replace process. 


Merrill argued that all delay-related damages were covered by the LD clause and therefore Blaine’s larger actual damages should not be considered. Note that the contract put a cap of $150,000 on LDs and the repair/replace efforts took so long that actual delay damages continued to accumulate and ended up being far more than $150,000. 


Blaine argued that the LD clause only applied to delayed completion, a pure time calculation, not to delays caused by defective deliveries. In other words, only late deliveries were covered by the LDs. Standing by itself, this argument seems strained. However, the contract also had a clause labeled “Approval of Goods” that changed the court’s focus. That clause stated that Merrill was liable “for all additional costs in performance as a result of defective or nonconforming goods.” (Emphasis added.)


These two clauses were conflicting with regard to defective deliveries: One provided for LDs for any delays; the other one provided for “all additional costs” for defective deliveries. This conflict caught Merrill off guard. In fact, prior to contract signing, Merrill had specifically demanded that the LD clause be modified by placing the $150,000 cap on its exposure. It did not catch the implications of the “Approval of Goods” clause. 


The court ruled in favor of Blaine that the LD cap did not apply. Underlying this decision is a principle of contract law that courts are to interpret contracts so that the various provisions can be read together and reconciled, i.e., to avoid what may initially appear to be conflicts between the terms and conditions. Using this principle as a starting point, the court stated that the “all costs” language for defective goods was independent of the LD clause.


There were ways in which the original contract between Blaine and Merrill could have been modified to avoid this unexpected result, but this case highlights a basic problem with construction contracts generally. Contractors are the ones who review them and agree to their terms, but the interpretation and meaning of these agreements are made by judges, and they live by very different rules than contractors do.