David R. Cook Jr. | Construction and Procurement Blog
A liquidated-damages clause was not enforced in a recent case before the Georgia Court of Appeals. The clause did not contain standard provisions that would normally allow a trial court to enforce the clause as written. As a result, the trial court looked beyond the contract to determine whether the City satisfied the requirements for enforcement of the liquidated-damages clause. Below are the relevant excerpts.
City of Brookhaven v. Multiplex, LLC, A23A0843, 2023 WL 4779591 (Ga. Ct. App. July 27, 2023)
Here, the Contract provides for “Liquidated Damages at the rate of $1,000.00 per calendar day” in the last paragraph of the Scope of Work addendum. The Contract lacks, however, any language indicating that the liquidated damages were not intended to be a penalty. See Fuqua Const. Co. v. Pillar Dev., Inc., 293 Ga. App. 462, 466, 667 S.E.2d 633 (2008) (rejecting use of parol evidence where the parties “explicitly agreed” in “unambiguous contract language” that the liquidated damages were not a penalty). Absent such language, the court can look to parol evidence in the record to determine the effect the provision was intended to have. See J.P. Carey Enterprises, 361 Ga. App. at 391-392 (1) (b), 864 S.E.2d 588 (looking to “extrinsic evidence” such as emails, documents, and deposition testimony to determine whether the damages provision at issue was a penalty); see also Gwinnett Clinic, Ltd. v. Boaten, 340 Ga. App. 598, 602-603, 798 S.E.2d 110 (2017) (“Shah’s testimony also suggested that one purpose of the liquidated damages provision was to deter employees from breaching the agreement”).
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Based on this deposition testimony from the City, there is evidence in the record that the Delay Clause was “inserted into a contract for the purpose of deterring one or both of the parties from breaching it, [and] it is a penalty.” Daniels, 191 Ga. App. at 71, 381 S.E.2d 87.
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The City argues that the Delay Clause should be upheld because the liquidated damages are less than .0004% of the total project cost (over $3 million dollars) for each day of delay, and because the damages “reflect the time-value of performance by a date certain.” But “the law requires pre-estimation,” and there is no evidence in the record that, prior to execution of the Contract, the City attempted to estimate damages resulting from late completion of construction. Physician Specialists in Anesthesia v. MacNeill, 246 Ga. App. 398, 401-402 (1), 539 S.E.2d 216 (2000) (rejecting “hindsight” estimation of damages where “[t]he record is devoid of evidence that prior to the execution of the Agreement, PSA endeavored to estimate damages resulting from a potential breach of the restrictive covenants”). Compare Joyce’s Submarine Sandwiches, Inc. v. California Pub. Employees’ Ret. Sys., 195 Ga. App. 748, 750 (2), 395 S.E.2d 257 (1990) (enforcing liquidated damages provision where both the lease and the record showed that “under the circumstances the $50 per day liquidated damages provided in the lease was a reasonable preestimate of the probable loss of percentage rent lost from Joyce’s and all the other mall tenants”). In the instant case, the City testified that liquidated damages clauses are “very” common in its construction contracts and that the $1,000 per day number was not project specific, but was instead a “standard” number. Thus, the amount of liquidated damages plainly has no reasonable relation to any probable actual damage which may follow a delayed completion of the project, and the Delay Clause is unenforceable.
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Accordingly, “we think a correct resolution of this issue must be found in the doctrine that in cases of doubt the courts favor the construction which holds the stipulated sum to be a penalty, and limits the recovery to the amount of damages actually shown, rather than a liquidation of the damages.”
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