Liquidated damages (“LDs”) provisions on State DOT projects are as certain as death and taxes.  However, a close read of the applicable caselaw on LDs in Connecticut leads one to believe that the LDs provision in the typical Connecticut Department of Transportation (“ConnDOT”) may not be legally enforceable.

Applying well established caselaw, ConnDOT must prove that three conditions have been satisfied for its LDs provision to be enforceable: 1) the damage expected as a result of breach by the contractor must be uncertain in amount or difficult to prove in light of the circumstances known at the time the contract is executed; 2) there must be an intent by both parties to liquidate damages in advance; and, 3) the LDs amount must be reasonable.  If even one of these elements is not proven the LDs provision is unenforceable.  These requirements ensure that a party injured by a breach of contract is fairly compensated for any ensuing damages because the LDs provision is simply a means to avoid proving damages through litigation.

ConnDOT typically does not look at the specifics of a project to determine an amount for LDs.  It uses a formula based on the total value of the contract regardless of whether future damages are uncertain or difficult to prove.  For many types of ConnDOT projects the anticipated additional costs are no more than the cost for additional inspection, which is not uncertain or difficult to prove.

A contractor has no input whatsoever with respect to LDs in a ConnDOT contract so there really is never “intent” by the contractor to include LDs.  LDs are never negotiated.  They are mandated by ConnDOT.  Yet, the law requires both parties to negotiate and agree upon what the future damages may be for breach at the time the contract is executed.  Generally, just signing a contract after reading it without any discussion or explanation concerning the LDs provision is not enough to prove intent by the parties to liquidate damages in advance.  There are no exceptions for State contracts.

Lastly, an amount stipulated in a LDs provision is reasonable if it is a fair estimate of the actual harm that might be suffered in the event of a breach of contract.   Anything more is considered a penalty and unenforceable.  A LDs provisions is also unenforceable if its prime purpose is to prevent a breach of contract by holding over the head of a contractor the threat of punishment for a breach.  In practice ConnDOT typically uses the threat of LDs over the contractor as a penalty for failing to complete the project on time. ConnDOT also invariably raises the threat of LDs to counter any claims raised by the contractor.

Even if ConnDOT can prove the LDs provision is enforceable there are additional hurdles to overcome.  ConnDOT must show that it suffered “real” damages.  Connecticut courts have refused to enforce a LDs provision if there is no evidence of damage or the evidence shows that the actual damages are substantially less than the amount in the LDs provision.

Many jurisdictions, including Connecticut, have adopted what is known as the “rule against apportionment” when analyzing the enforceability of LDs provisions.  That is, where there are delays on a project attributable to both the owner and the contractor the LDs provision becomes void preventing the owner from collecting any LDs at all.  The owner is not allowed to enforce a LDs provision when it contributes to a delay in performing the contract.  Some federal courts have recently moved away from this rule allowing the government to collect LDs for the limited periods where it can prove that it did not contribute at all to a delay by clearly apportioning the delay attributable to each party.  However, the rule in Connecticut hasn’t changed and it’s a potentially significant problem for ConnDOT.

There are several other issues on which ConnDOT is vulnerable to attack including whether LDs can be imposed after a project is substantially complete or during winter shutdown periods when no work is performed by either party.

The enforceability of the LDs provision in ConnDOT contracts is not a “given” for all the reasons described above.  Any contractor facing the threat of LDs should challenge ConnDOT to prove entitlement to LDs.   ConnDOT must be held accountable for proving it actually suffered damages and that it in no way contributed to the delay giving rise to the LDs issue in the first place.

The information contained herein is for general information only and should not be relied upon as legal advice.  This information cannot be applied to specific facts and circumstances without advice from legal counsel.