In American Electric Co. LLC v. Parsons RCI, Inc., 2015 U.S. Dist. LEXIS
26087, the Hawaii U.S. Dist. Court was asked to rule on a summary judgment motion to eliminate a claim for liquidated damages in a construction project based upon the allegation that, in fact, the complaining party had suffered no damages and therefore, could not claim liquidated damages.
In analyzing this argument, the court attempted to predict what Hawaii's appellate courts would say on this issue. While it is not in dispute that under Hawaii law, liquidated damages must bear some relationship to a party's damages, the open question is which damages are to be measured -- actual damages, or anticipated damages? In other words, if parties anticipate at the time of contracting that they will suffer great damages in the event of delayed completion, but end up suffering minimal or no damages, can they still make a liquidated damages claim?
In the Parsons case, the contractor argued that in fact the complainant suffered no damages, because it was never itself assessed with any liquidated damages, and in fact received a bonus for completion of the job. The complainant argued that at the time of contracting, both sides agreed and understood its damages would be great if performance was delayed, and that in fact it did receive a lesser bonus than it would have if the job was completed on time, plus it had to pay certain monies to remedy defective work in order to secure additional time for the contract and avoid its own liquidated damages liability.
The court found under Hawaii law, it is clear that courts look to actual damages to measure against liquidated damages to determine if they are enforceable. However, the court also found that Hawaii's courts have never stated that anticipated damages are not to be likewise used as a measure against liquidated damages and that certain cases cites by Hawaii's courts take just such an approach. Thus, the court looked to both, ultimately finding issues of fact on both such approaches prevented a finding of summary judgment.
For drafting practitioners seeking enforcement of their liquidated damages clauses, this case emphasizes the importance of being able to demonstrate that the liquidated damages number used in the contract was actually discussed, negotiated, and agreed-upon, and not simply plucked from thin air and dropped into the agreement. Conversely, from the Contractor's side, if you are anxious not to have to pay liquidated damages in the event no delay damages are incurred, you should definitely include such a provision in the contract's liquidated damages clause, i.e., "Notwithstanding the above, in no event shall any liquidated damages be sought or obtained in the event no actual damages are suffered."