Liquidated Damages: what, when, & why

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water dropWhat are Liquidated Damages?

Liquidated Damages are a sum which a party to a contract agrees to pay or a deposit he agrees to forfeit, if he breaks some promise.  In the construction realm, liquidated damages (or “LDs”) usually involve money damages for time delays on a construction project.    Typically, a contract will state that time is “of the essence” and that for every day past the scheduled completion date (as modified by change orders & directives) a set amount is due from the contractor to the owner.

When can you get liquidated damages? (or, when must you pay liquidated damages?)

Liquidated damages must be specified in the contract up front.  They should reflect the reasonable estimate of likely damages that will be incurred if the contractor fails to complete the project timely.

To be enforceable, the amount must have been arrived at by a good-faith effort to estimate in advance the actual damage that would likely ensue from the breach, and they cannot be deemed “penalties.”  Eastern Carolina Internal Medicine, P.A. v. Faidas,  149 N.C.App. 940,  564 S.E.2d 53 (2002).

Why?

The purpose of liquidated damages is to reasonably compensate the non-breaching party (typically, the owner for construction delays) which it will likely incur as a result of the breach (e.g., the extended completion date results in lost rent and increase finance charges).  Without the liquidated damages provision, the parties would be forced to argue about each alleged cost the owner incurred because of the delay.  With liquidated damages, the amount is known ahead of time which should (theoretically) lead to fewer arguments later.

When doesn’t the provision work?

Two words—concurrent delay.  If the owner is delaying the project (through, for example, failure to deliver/install owner-provided equipment), but the contractor is also behind on completion, the two delays may run at the same time—hence “concurrent delay”.  In such a situation it becomes difficult if not altogether impossible to separate delays and delay damages.  Of course, if the entire delay is owner-related, no liquidated damages can be assessed.

Take-away message

Liquidated damage provisions, if carefully and properly drafted, are enforced in North Carolina.  You should know your schedule requirements prior to signing on the dotted line and, if necessary, accelerate your work to complete on time.  If you are the owner, however, you also have responsibilities not to interfere with the schedule if you hope to have a chance at recovering liquidated damages from a contractor who delivers a project late.

Questions?  Comments?  Experience with the joys (and sorrows) of LDs?  Share in the comments below.

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Photo “Water drop bouncing off the water surface” by konradc via Picasa/Creative Commons License.

Timing can be everything (Tues Tip)

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alarm clockIt is always easiest, cheapest, and surest to deal with legal issues right away.   Problems ignored are problems amplified.  A recent North Carolina Court of Appeals cases prove the point:

In the recent NC Court of Appeals case Meier v. City of Charlotte (Aug. 17th, 2010), the Court held that a zoning administrator’s determination could not be appealed because the plaintiff failed to appeal within the 30 days provided by law and, therefore the Board of Adjustment no longer had jurisdiction to hear the appeal.  The petitioners are left to live next to an (allegedly) 50 foot tall house.

This case demonstrates that timeliness is crucial to your case when dealing with the courts.  Don’t delay if you think you have a cause of action, because delay could mean you lose before your case even gets out of the gate.

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Photo  “Alarm Clock” by Freefoto.com via Creative Commons License.

What is Indemnity, and why should you care?

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barber shop poleIf you have ever asked a lawyer to review your construction contracts (and you should have), you may have noticed that lawyers get very excited over the indemnity provisions that may or may not be in the contracts you are contemplating signing.  What are indemnity provisions, and why should you care?

What is it?

Quite simply, an indemnity provision is a statement that one of the parties agrees to pay any sums the other party might otherwise be legally required to pay to a third party.  Now that I’ve mentioned picking up someone else’s tab, I hope I have your attention.  As you might imagine, an indemnity provision can be a costly item, so you should have a thorough understanding of what such a provision means.

In general, indemnity provisions are contractual, and contract rules concerning them apply.  What that means is, if the contract says you will pay for the owner/builder/developer/designer’s legal liabilities to others, you may have to open the checkbook.

Common Indemnity Provision

An example of one type of indemnity provision is AIA A201 3.18.1, which states:

To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. . . .

When is it not legal?

There are some exceptions to the general applicability of indemnity provisions in North Carolina—most noticeably: you cannot be indemnified against your own negligence.  If an indemnity provision purports to indemnify one party against that person’s own negligence, public policy and state law prohibit such an indemnification in North Carolina  The applicable statute N.C. Gen. Stat. §22B-1, which reads:

§ 22B-1. Construction indemnity agreements invalid

Any promise or agreement in, or in connection with, a contract or agreement relative to the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify or hold harmless the promisee, the promisee’s independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury to persons or damage to property proximately caused by or resulting from the negligence, in whole or in part, of the promisee, its independent contractors, agents, employees, or indemnitees, is against public policy and is void and unenforceable. Nothing contained in this section shall prevent or prohibit a contract, promise or agreement whereby a promisor shall indemnify or hold harmless any promisee or the promisee’s independent contractors, agents, employees or indemnitees against liability for damages resulting from the sole negligence of the promisor, its agents or employees.
[Emphasis added].

However, construction indemnity clauses indemnifying a party for its own negligence can be valid and enforceable so long as the offending portion of the indemnity clause can be redacted (that is, stricken from the paragraph).  Vecellio & Grogan, Inc. v. Piedmont Drilling & Blasting, Inc., 183 N.C.App. 66, 644 S.E.2d 16 (2007).  In the example of the AIA A207 provision above, the phrase “To the fullest extent permitted by law” acts to keep the phrase within the permissible parameters of North Carolina law.  Therefore, if you signed a contract with such a provision, you may be on the hook.

Be Careful with Indemnity Provisions

Not all indemnity provisions are equal.  Some, such as in the above example, make attorney fees part of the expense which is passed along.  Others expressly exclude attorney fees.  Some provisions include a “duty to defend” on behalf of the other party, while others are silent on that issue.  What is most important is that you recognize that such language is extremely important and should be discussed in detail with your knowledgeable construction lawyer.

As with getting your hair cut, you could do it yourself, but should you?

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Photo “Barber Shop Pole” by MyEyeSees via Flickr/Creative Commons License.

Review your Deed Before you Build (Tue Tip)

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(Or, Reason # 529 why you need a lawyer)

A recent North Carolina case shows why you really need to consult with a lawyer before you build.  Deed of TrustIn the swanky Myers Park section of Charlotte, setback requirements were contained within property deeds, a hold over from the pre-zoning days of the early 20th century.   A $500,000 addition to a residence was built that violated the setback, and the Court of Appeals held that the neighbors were not enjoined from suing to force compliance even though they waited over two months (during which construction was substantially completed) to bring suit.

 The case is Irby v. Freese.  Of note, the homeowners built the addition without benefit of an attorney or architect, so the deed restriction was not noticed.

The Court of Appeals was only addressing the issue of undue delay in bringing the lawsuit, because a two month delay occurred during which significant sums were spent by the homeowners to dry in the building.  The Court held that, under the specific facts of the case, a two month delay was not fatal to the claim.  Stay tuned for further details, as the case is far from over.  It has been remanded to the trial court for a full trial.

And, be glad that this isn’t you.  This could prove to be a very costly mistake, in which the entire addition may have to be demolished because of the violation of the setback requirement contained in the property deed.

Read your deed.  Read your covenants. When in doubt, hire real estate counsel before you pick up the shovel.

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Photo “February 5, 2010- Paperwork” via Caitlin Childs via Flickr- Creative Commons license.

What is “green design” ?

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What is included in “gPlatinum LEED signreen design”? Green design (also known as sustainable design or environmental design) is the concept of construction built with principles of economic, social, and ecological sustainability.  The most well-known green design, by far, is the LEED green building certification process of the US Green Building Council.

Yesterday, I had a chance to attend Phil Kabza (“SpecGuy”)’s presentation “Specifying LEED Requirements: The Best of Green from Masterspec” at the GreenNC trade show.

According to Phil, there are 4  general LEED credit requirements for construction, including:

1.  Refrigerant & clean agent removal

2.  Construction waste management

3.  Construction indoor air quality management

4.  Measurement & verification (post construction)

As Phil emphasized, LEED specs must be project specific, and should not simply be cut and pasted from previous projects.

Want to see a LEED specification in action?  Check out an example of a LEED Spec on Sustainable Design Requirements (01 81 13) here.

Interested in learning more about LEED and its requirements?  Check out the mother of LEED, the USGBC .

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Photo “Platinum LEED” by Seth Anderson via Flickr/Creative Commons License.