Liquidated Damages Upheld in Contract Dispute

At issue in, Abhe & Svboda v. State, 2017 Mich. App. LEXIS 1387, *9, is whether a liquidated damages provision could be enforceable against Plaintiff Abhe & Svobda, Inc, when it failed to complete its project of painting and cleaning a portion of the Mackinac Bridge in accordance to the contract’s terms. The Court of Appeals affirmed an award of liquidated damages to the Defendants in the amount of about $2 Million (the contract provision at issue allowed liquidated damages of $3,000 for every day that the project was delayed beyond a specified completion day, and the trial court found that completion of the project was 644 days late).

Plaintiff argued on appeal that the liquidated damages provision within the contract was an unenforceable penalty, and that the delay was brought on by unforeseen circumstances. The Court acknowledged that liquidated damages “must be an honest attempt to estimate damages… rather than a penalty.” However, the Court reasoned that in this case the liquidated damages provision was clearly formulated as a means to address the actual damages brought on by the delay in completing the project. In short, there was no basis to show that the provision was actually a penalty, nor that it was anything other than a protection from the damages brought on by Plaintiff’s failure to adhere to the contract’s strict scheduling requirements.

Plaintiff then claimed that the liquidated damages provision should not apply because Defendants’ own behavior prevented it from completing the project on time. Quoting an earlier decision, the Court agreed that liquidated damages could not be enforced when another party caused the other to fail or breach. However, in this case, Plaintiff failed to take advantage of relief that was provided for within the contract in the event that a delay occurred.  Specifically, the contract between the parties allowed for Plaintiff to submit an extension request within 14 days of an unforeseeable delay. Therefore, by failing to make such a request and use its contractually provided remedy, Plaintiff could not rely on the provision to constitute a waiver of the liquidated damages provision. Plaintiff agreed to the terms of the contract under its own free will, and was cognizant of the fact that delay could cause Defendant damages, thereby triggering the liquidated damages provision. Plaintiff cannot ignore its contractually provided remedies and retroactively look to the court to absolve it of its specifically defined obligations.

This article was written by Nezar Habhab, Law Clerk.



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