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Tuesday, April 2, 2013

Liquidated Damages Clause Leads to Protests in the Streets of Ann Arbor

A student recently sent me this story as an example of a liquidated damages clause gone awry, at least for the contractor. The contractor, Crystal Corp., was supposed to remodel a building to be the new location for a restaurant, Kuroshio, by September 30th. The work was not completed until late December. The contractor does not appear to be contesting whether there was a breach. However, he is contesting the damages.

The contract apparently contained a liquidated damages clause that specified a per-day penalty for any delays. It also required Crystal to notify Kuroshio, in writing, of any delays, and the reason(s) for those delays. Crystal did not supply the required notice. And, because of the length of the delay, the contractor now reportedly owes more money to Kuroshio than he is owed for completing the work. Further, because the contractor has not been paid by the restaurant, he reportedly has not paid his own employees. Thus, the contractor and/or his employees have taken to the street in front of the restaurant.  According to AnnArbor.com, they protested in front of the restaurant every evening for over a week (there's no obvious update since late March). A protester's photo is available here.

I thought this case was a good one to mention in class because it's not every day that a contract dispute leads to public protest. More specifically, I hope to use this dispute to illustrate how liquidated damages clauses may not be enforceable (the cases in the text I use, Kvassay and O'Brian, are great but a present day example always seems to work better for cementing the material into students' minds).  

I also hope to use this dispute as an example of another theme I stress in class.  I tell my studentes that, as a deal lawyer, they'll often have to be the most negative person in the room.  They have to ask many "what if" questions of their clients before suggesting they sign contracts.  For example, "What if...you get inside and find out that the HVAC system is in terrible disrepair? Are you going to want to pay the per-day penalty in that situation? If not, then we need to revise the contract because, as written, you're going to be on the hook for the daily penalty no matter what."  I'm not sure how much of this they'll remember but I'm hopeful that at least some of it will stick with them.

[Heidi R. Anderson, h/t to student Michael DeRosa]

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Comments

There are no penalties in contract law. Liquidated damages are not penalties, but rather a reasonable estimate of damages agreed upon by the parties at the time of contracting.

Posted by: Charisse Heath | Apr 3, 2013 5:53:10 AM

It is true that a liquidated damages clause that operates as a penalty will not be enforced. But that does not prevent parties from drafting penalty-like clauses, as apparently was the case in this dispute.

Posted by: Heidi R. Anderson | Apr 3, 2013 8:46:18 AM

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