Christopher G. Hill | Construction Law Musings
I’ve discussed the continuing litigation between White Oak Power Constructors v. Mitsubishi Hitachi Power Systems Americas, Inc. previously here at Construction Law Musings because the case was another reminder that your construction contract terms matter and will be interpreted strictly here in the Commonwealth of Virginia. The prior opinion in this case from the Eastern District of Virginia court the Court considered the applicability of a liquidated damages provision. In the latest opinion from the Court (PDF) the Court looked at when and how any liquidated damages would be calculated. In its June 22, 2020 opinion, the Court put the issue as follows:
White Oak’s motion for partial summary judgment presents a narrow issue: whether courts may consider the damages actually sustained by a party as a result of a contract breach when deciding if liquidated damages required by a contract “grossly exceed” a party’s actual damages.
Mitsubishi argued that White Oak could not enforce the liquidated damages provisions of the contract (all of which are laid out in the opinion linked above) because the liquidated damages were not reasonable and “grossly exceeded” the actual damages incurred by White Oak because of project delays allegedly caused by Mitsubishi. Mitsubishi argued that the Court must look retroactively at the actual damages incurred when determining whether the liquidated damages constituted a penalty. White Oak argued that the Court should look proactively at what the parties thought damages could be at the time of contracting. After a thorough review of Virginia law, the Court agreed with White Oak and stated:
[c]ourts applying Virginia law must consider the actual damages contemplated at the time of contract when determining the reasonableness of a liquidated damages provision. Moreover, the fact that courts must focus on the intent of the parties based on the circumstances at the time of contract formation further supports applying the prospective approach. Accordingly, Mitsubishi may not challenge the liquidated damages provision based on the damages White Oak suffered after the alleged delays occurred.
In short, when drafting or reviewing liquidated damages provisions for your construction contracts with the assistance of an experienced Virginia construction lawyer, be sure to have them be “indexed” to the prospective damages the parties reasonably consider to be possible when the contract is made. You are not likely to win an argument after the fact-based upon the actual damages incurred.
As always, I recommend that you read the entire opinion for yourself and draw your own conclusions. Also, please let me know with a comment if you have any thoughts on my analysis.