When Liquidated Damages Are Deemed Too High

When Liquidated Damages Are Deemed Too High

By Trent Cotney, Adams and Reese, LLP
Look What Happened to this Contractor!

If you check any of your contracts, you will likely see provisions that allow for “liquidated” damages. Claimants can recover these pre-determined damages after a breach. These provisions provide specifics about the consequences of the breach and simplify the need to prove damages during a trial. That seems straightforward enough. However, as a recent case illustrated, liquidated damages provisions may not be enforceable if their amounts are wildly different from actual damages.

Details of the Case

In 2018, a homeowner named Dean Suchy contracted with Smart Constructing & Remodeling to make repairs to his home following damage from a storm. The six-page contract stated that the contractor would work with the homeowner’s insurance company to determine the scope of the work and the maximum approval coverage. The work was to include repairs to the house’s roof, siding, fascia, gutters, and deck, as well as repairs to the shed’s roof, doors, siding, and fascia.

The contract also included a liquidated damages clause. It stated that if the customer canceled the contract or did not make the premises available to the contractor, the customer was obligated to pay liquidated damages equaling 30 percent of the insurance-approved amount. The insurance approval process had not yet begun when the contract was signed.

After some back-and-forth with the insurance company, in January 2019, the contractor finalized the total cost to be $100,000. That included an estimate from the insurer, plus 10 percent overhead and 10 percent profit for the contractor.

In June 2019, the homeowner informed the contractor that he did not want the contractor to make the repairs after all. At that point, no work had begun, no subcontractors had been hired, and no materials had been purchased. However, per the contract terms, the contractor demanded liquidated damages of $30,000 (30 percent of the final amount). The homeowner refused to pay, so the contractor filed a claim for breach of contract.

What the Courts Decided

In the initial trial, the jury sided with the contractor. It determined that the homeowner had breached the contract, so it awarded the contractor 30 percent liquidated damages. However, the homeowner made a motion to set aside the jury’s decision. He claimed that 30 percent liquidated damages were disproportionate since the contractor’s actual damages were 20 percent at most. The trial court agreed with the motion, and in Smart Construction & Remodeling v. Suchy, 2023 WL 5525071 (Minn. Ct. App. August 28, 2023), the appellate court did as well.

Courts can refuse to enforce provisions for liquidated damages if they are viewed as punitive instead of fair. In this case, the court ruled that the contractor’s actual damages would have been no more than 20 percent, so an additional 50 percent ($10,000) was considered excessive.

Since the contractor had sued only for liquidated damages, and not actual damages, he recovered nothing from this lawsuit. When his claim for liquidated damages was denied, he had no recourse for recovering actual damages.

Advice for Contractors

When you write, revise, or sign contracts, you must ensure that liquidated damages are reasonable and will be approximately equivalent to actual damages. Otherwise, courts can choose not to enforce liquidated damages provisions. In addition, if you file a claim for liquidated damages, be sure to make a claim for actual damages as well. Otherwise, you could end up like this contractor, with no payment for months of time and effort.

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams and Reese LLP and RCAW General Counsel. You can reach him at trent.cotney@arlaw.com or 866.303.5868.

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