Liquidated damages clauses in construction contracts

If you are ever involved in property development, a liquidated damages clause is something you ought to be familiar with. What is a “liquidated damage”? It is basically an amount of damage that contracting parties agree to during the formation of the contract, which is applied if the agreement is breached. In other words, rather than the parties trying to calculate damages after a breach happens, they pre-determine the damage amounts.

These clauses are usually favored and often upheld in Washington State. Ashley v. Lance, 80 Wash. 2d 274, 280, 493 P. 2d 1242, 62 A.L.R. 3d 962 (1972). To determine whether they are enforceable, Washington courts generally require the following two factors to be satisfied:

(1) Liquidated damage must be reasonable (just compensation for the harm caused by the breach);

(2) It must be very difficult or impossible to determine the harm beforehand.

Walter Implement, Inc. v. Focht, 107 Wash. 2d 553, 559 (1987).

A liquidated damages clause will NOT be upheld if it is show that the provision is simply a penalty or is otherwise unlawful. Jenson v. Richens, 74 Wash.2d 41, 47, 442 P.2d 636 (1968).

In short, parties can pre-set what a contract breach will cost the breaching party. This allows for a clear assessment of damages, provided that it is not a penalty. The liquidated damages must not only be reasonable when compared to the harm of the breach, but the harm caused must be difficult or impossible to ascertain.