NASCLA Accredited Commercial General ContractorGeneral RequirementsMedium
A commercial general contractor is hired for a project with a fixed completion date. The contract includes a clause stating that for every day the project is delayed beyond this date, the contractor will pay the owner $1,500. This amount is a reasonable pre-estimate of the actual damages the owner would incur. What type of contract clause is this?
- ALiquidated Damages Clause
- BIndemnification Clause
- CForce Majeure Clause
- DPenalty Clause
Show answer & explanationAnswer & explanation
Correct answer: A. Liquidated Damages Clause
A liquidated damages clause specifies a predetermined amount of money that must be paid as damages for a breach of contract (like delayed completion), provided that the amount is a reasonable forecast of the actual damages and not a penalty.
Why the other options are wrong
- B. An indemnification clause shifts liability for losses generally, not specifically for delays.
- C. A Force Majeure Clause excuses delays due to unforeseeable events, not defines penalties for avoidable delays.
- D. A penalty clause is generally unenforceable if the amount is excessive and not a reasonable pre-estimate of actual damages.
Liquidated Damages Clause
A contract provision that specifies a predetermined sum of money that one party will pay the other as compensation for a specific breach of contract (e.g., late completion).
- Must be a reasonable estimate of actual damages, not a punishment.
- Aims to avoid difficult calculation of actual damages in court.
- Common in construction contracts for project delays.
Memory trick: Liquidated damages: a 'liquid' sum for 'late' harm.