Issues Impacting Enforceability of Liquidated Damages in Construction Contracts

Luke Tompkins | Ward and Smith

Liquidated damages provisions are common in construction contracts to guard against damages that the owner or a contractor might suffer if a project is delayed beyond the completion date set forth in the contract.  These provisions appear in both public and private construction contracts.  Oftentimes, the owner of a construction project will include a liquidated damages provision in the prime contract with the general contractor.  The provision might state, for example, that if the project is delayed beyond the required completion date, the owner may assess against the general contractor liquidated damages in the amount of $1,000.00 per day until the project is complete.  The general contractor, in turn, will likely include a similar clause in its subcontracts passing along the risk of liquidated damages to its subcontractors if delays to the completion of the project are caused by the acts or omissions of the subcontractor.

Liquidated damages provisions are helpful because they establish the damages for construction delays at the outset of the project and eliminate the need to prove actual damages.  The party whom the liquidated damages clause benefits need only prove that the performing party delayed completion of the project to be entitled to recover the amount of damages listed in the contract.  In the absence of a liquidated damages provision, to recover damages for delay, an owner or contractor has to prove both that the contractor delayed the project and the actual damages that were caused by the delay.  Demonstrating actual damages is a difficult task that requires detailed proof that ties the loss to the period of undue delay with reasonable certainty.  Thus, being able to rely on liquidated damages for delay provision can be quite useful.

Liquidated damages clauses are generally enforceable, but most courts will not enforce a liquidated damages provision if (1) it constitutes a penalty as opposed to a reasonable estimate of the actual damages likely to be incurred due to delay, or (2) the party benefitting from the liquidated damages clause is responsible for a portion of the delay to completion of the project and the contract does not provide for apportionment of damages in the case of mutual delays.

I. Liquidated Damages vs. Unenforceable Penalty

North Carolina courts recognize a two-pronged test for determining whether liquidated damages are enforceable or constitute a penalty: (1) the damages from the breach of contract must be difficult to ascertain as of the time the parties entered the contract; and (2) the amount of damages stipulated must either be a reasonable estimate of the damages which would probably be caused by a breach or reasonably proportionate to the damages actually caused by the breach.  If the party disputing liquidated damages can prove either that actual damages were not difficult to ascertain or that the liquidated damages were not a reasonable estimate of actual damages and were not reasonably proportionate to the actual damages, the liquidated damages provision will not be enforced.

To show that damages were not difficult to ascertain, the party opposing liquidate damages has to show that there was a clear, objective basis for measuring all aspects of the actual damages that might result from the breach.  This is an extremely steep challenge in the context of liquidated damages for delays to construction projects.  First, North Carolina courts give substantial weight to stipulations by the parties in the contract that damages are difficult to ascertain.  Therefore, if the contract includes a clause stating that both parties agree the measure of damages that will result from project delays is difficult to ascertain, this will usually suffice to demonstrate that damages were in fact difficult to ascertain.  Second, courts often find that damages are difficult to ascertain when the project at issue is complex or involves a large undertaking, as is often the case with construction projects.  Lastly, delays in the completion of construction projects generally bring in to play many potential items of damages, including lost profits due to not opening the completed project on time, continued costs associated with operating other facilities that the project was meant to replace, increased costs of construction, etc.  Thus, it is unlikely that the party opposing liquidated damages for delays on construction projects will be able to show that damages were not difficult to ascertain at the time of contracting.

To demonstrate that liquidated damages are not a reasonable estimate of actual damages and that they are unreasonably disproportionate to actual damages, the party opposing liquidated damages must show that there was no reasonable attempt to estimate damages prior to contracting and that liquidated damages are shockingly excessive when compared to the actual damages suffered and the overall value of the contract.  As with the first prong, courts will generally defer to the parties if the parties stipulate that the amount of liquidated damages is a reasonable estimate of the damages that will likely result from delays to project completion.  If such a stipulation exists, this will be difficult to overcome, so contractors and subcontractors should refuse to sign such a stipulation if you believe the amount of liquidated damages is unreasonable.

Next, because liquidated damages are meant to approximate actual damages, courts will consider whether the liquidated damages amount is based on a reasonable estimate of actual damages made by the owner or contractor, or whether the liquidated damages amount was simply a random arbitrary amount.  Lastly, the court will look to whether liquidated damages are shockingly disproportionate to actual damages.  Courts have held that liquidated damages twice the amount of actual damages were reasonably proportionate to actual damages.  Thus, the party opposing liquidated damages will need to show that liquidated damages far exceed actual damages to succeed in having them ruled an unenforceable penalty.

In conclusion, contractors or subcontractors opposing liquidated damages for delays to construction projects face a difficult task in demonstrating that a liquidated damages clause is an unenforceable penalty.  It is nearly impossible to show that delay damages were not difficult to ascertain at the time of contracting.  However, if the contractor or subcontract can show that the liquidated damages amount was an arbitrary amount that far exceeded actual damages, a court may conclude that the liquidated damages constitute an unenforceable penalty.  On the other hand, owners and contractors can likely avoid having liquidated damages for delay clauses overturned as unenforceable penalties if the liquidated damages amount reflects a sincere attempt to estimate actual damages and their contract includes stipulations that actual damages are difficult to ascertain and that the liquidated damages amount is a reasonable estimate of actual damages.

II. Mutual or Concurrent Delays by Contracting Parties

Under North Carolina law, it is clear that the party benefitting from a liquidated damages provision cannot recover liquidated damages if it is responsible for all of the delays to the project.  In addition, North Carolina law states that liquidated damages are unenforceable if the party benefitting from the liquidated damages was itself responsible for a portion of the delays to project completion unless the contract contains a clause providing for apportionment (i.e. division) of liquidated damages in the case of mutual delays.  This rule, which I’ll refer to as the “Non-Apportionment Rule,” was recognized by the North Carolina Supreme Court in 1967.  Under the Non-Apportionment Rule, if the owner or contractor whom the liquidated damages clause benefits is responsible for any amount of the delays to project completion, they cannot recover liquidated damages unless the contract authorizes project delays to be apportioned between the parties so that liquidated damages can be assigned to the contractor or subcontractor based on the delays they are responsible for.  In other words, an owner’s or contractor’s responsibility for a portion of the project delay can result in not being able to recover liquidated damages for delays caused by the performing party.  Notably, there is a trend among other jurisdictions away from the Non-Apportionment Rule because some courts have found it to be overly harsh.  North Carolina’s Non-Apportionment Rule, however, has never been overruled and was applied by the North Carolina Court of Appeals as recently as 2007. 

Based on the Non-Apportionment Rule, mutual delays can serve as a basis for complete avoidance of liquidated damages where the contract does not authorize apportionment of liquidated damages.  Thus, parties seeking to avoid or enforce liquidated damages should be aware of the Non-Apportionment Rule.  Owners or contractors seeking the benefit of liquidated damages provisions should consider including a provision in your contract for apportionment of liquidated damages in the case that both parties are responsible for delays (i.e. there are mutual or concurrent causes of delay).  If an apportionment clause is included in the contract, the performing party should negotiate for any apportionment of delays to be administered by a neutral third party, so as to eliminate any bias in dividing the delays among the parties.  If it is not included, the performing party should seek to prove mutual delays as an avenue to avoid liability.  In either case, both parties should be sure to document and collect evidence of all delays which you contend the owner, contractor, or a subcontractor has caused to the project as you may need this evidence to either establish your right to liquidated damages or to escape or minimize your liability for liquidated damages. 


In conclusion, liquidated damages clauses provide a helpful remedy to the party harmed by delay in circumstances where calculating actual delay damages is difficult.  Liquidated damages, however, will not be enforced if they do not reflect a reasonable estimate of actual damages and are grossly excessive in comparison to actual damages.  Additionally, unless the contract provides otherwise, liquidated damages for delays will not be enforced by the courts if the party seeking enforcement is responsible for some of the delay at issue.  Participants in the construction industry should keep these issues in mind when negotiating and entering into construction contracts.

What to Expect at Mediation

John Davidson | Nexsen Pruet

“This isn’t what I expected.” I hear that comment frequently from people that do not often participate in mediations. If you are involved in the construction industry, you will very likely have to participate in a mediation at some point to try to resolve a dispute. It might be a construction defect case, a payment dispute, a claim involving an ongoing project, or a myriad of other issues. Lawyers participate in mediations all the time. Clients, usually not so much. In fact, many clients participate in very few mediations and may have no idea what to expect. This article will help with that.

What is mediation?

A mediation is an in-person or virtual meeting between parties, whether individuals or companies, and their lawyers to try to settle a dispute. In order to give some structure to the settlement discussions, the meeting is run by a mediator. The mediator is neutral and does not advocate for either side. The mediator’s job is to talk to each of the parties, ask questions about each party’s position and case, and to explore areas of common ground to try to get the parties to reach a resolution.  

Is mediation the same as arbitration?

No. Arbitrations are essentially private trials that result in an award and generally a winner or loser. A mediation does not result in an award or a winner or loser. The mediation will only result in a resolution of the dispute if the parties agree to it. No one in a mediation will force a decision on you – the decision to settle is up to the parties entirely.

What happens at mediation? 

Although processes can change, a typical mediation looks like the following.

Parties will first meet together with the mediator. The mediator will likely have everyone introduce themselves and will explain the process. The mediator will then tell you that discussions during the mediation are privileged and cannot be divulged at a hearing or trial and nothing said at the mediation can be brought up later. That does not mean the facts of the case or information learned are inadmissible later, but you cannot use something said or an offer made at the mediation later. The mediator will also remind everyone to be professional and civil. 

The mediator will then give each side an opportunity to explain the dispute and their position. The plaintiff usually goes first and the lawyer will give their position. The others parties will then do the same. Although the lawyers usually do most of the talking, clients are allowed to talk if they would like. But, always discuss what you plan to say with your lawyer and decide whether it is better to talk in the opening session or later in private with the mediator. 

After opening remarks, the mediator will likely have the parties go into separate rooms so he or she can privately talk with each of them. In these private discussions, the mediator will ask questions about their positions, probe into and challenge those positions, and ask parties to pay attention to and consider the other side’s position. 

At some point, possibly in the first private session or later, the mediator will ask the parties to begin making offers and counteroffers – to negotiate. The client will have an opportunity to discuss with their lawyer his or her response and how it will be communicated to the other side. Through discussions with the mediator, they will get insight into what the other side feels is important and what it is looking for in a settlement. The other side will get the same insight about you.

During these private sessions, the other side will be planning their next move. You will wonder what is going on with the other parties and why things are taking so long. This is where I see parties get impatient and distrustful of the process and want to leave. All of those feelings are normal. However, you should trust that the mediator is working hard to settle your dispute. He or she will let you know if things cannot be resolved. 

Mediations typically do not go quickly. It takes time for everyone to get comfortable with the process and to be willing to compromise. Mediations routinely take a full day or longer. 

If the mediator decides there is no opportunity to settle the dispute, he will end the mediation. However, at the end of the day, if he or she thinks there is still an opportunity to settle, the mediator may suggest you adjourn for the day, and then continue to talk to the lawyers by phone to try for a resolution.  

If you reach an agreement, the parties will do a short settlement agreement at the mediation, to make it binding. The agreement will include all necessary terms of the settlement. If a longer agreement is needed, the lawyers will work on it in the following days after the mediation has concluded. 

There are many other details in what happens at mediations, which I’ll touch on in a later article. However, these points should help you understand the mediation process and make you more comfortable in participating in that process.

Insurance Policies and Indemnity Provisions Are Not the Same

Garret Murai | California Construction Law Blog

Just because you own a pair of Air Jordans doesn’t make you Michael Jordan. In the next case, Carter v. Pulte Home Corporation, Case No. A154757 (July 23, 2020), the 1st District Court of Appeal denied an insurance carrier’s equitable subrogation claim explaining that an insurer’s obligations under its insurance policy are not the same as an idemnitee’s obligations under an indemnity provision. Or, as aptly put by the Court of Appeal, while a “subrogated insurer is said to ‘stand in the shoes’ of its insured, because it has no greater rights than the insured. Here . . . [the insurer] is seeking to stand in a different, more advantageous set of shoes.” 

Carter v. Pulte Home Corporation

Pulte Home Corporation was sued for construction defects by 38 homeowners in two housing developments. Various subcontractors had worked on the projects, but under their subcontracts, each subcontractor agreed to indemnify Pulte from and against “all liability, claims, judgments, suits, or demands for damages to persons or property arising out of, resulting from, or relating to Contractor’s performance of work under the Agreement (‘Claims’) unless such Claims have been specifically determined by the trier of fact to be the sole negligence of Pulte . . . ”

Pulte tendered the claim to its subcontractors and Travelers Property Casualty Company of America, the insured for four of the subcontractors, accepted the tender under its policies. Insurance carriers for seven subcontractors, however, refused to accept Pulte’s defense claiming that their policies did not require that they indemnify Pulte.

Thereafter, Travelers filed a complaint in intervention against the seven subcontractors and their insurers for declaratory relief, equitable subrogation, equitable indemnity and contractual subrogation. Travelers later dismissed each of its causes of action except its claim for equitable subrogation.

The homeowners’ claim against Pulte ultimately settled with Travelers having paid $320,491.82 for Pulte’s defense. Travelers later recovered $164,400 from other subcontractors, but as to the balance of $156,091.82, the seven subcontractors and their insurers refused to reimburse Travelers, and the case went to trial.

At trial, Travelers took the position that the seven subcontractors and their insurers were “jointly and severally liable” for the $156,091.82 balance in defense costs. In other words, each of the seven subcontractors and their insurers were responsible for the entirety of the $156,091 balance in defense costs irrespective of their actual proportionate responsibility of allegedly defective work.

In line with the position Travelers took at trial, Travelers filed a motion in limine to exclude all evidence or argument suggesting that damages should be allocated or apportioned among the seven subcontractors in proportion to their allegedly defective work. This motion was granted by the trial court. In addition, Travelers filed, and the trial court granted, a motion in limine excluding all evidence or argument regarding whether the work of the seven subcontractors was defective or caused damage.

During the trial, the evidence showed that there was considerable variation in the number of homes each of the seven subcontractors worked on. Two of the seven subcontractors worked on each of 38 homes, another worked on 30 of the 38 homes, two worked on 23 of the 38 homes, and the remaining two worked on only six or eight of the 38 homes.

Following the presentation of evidence including closing argument, the court found that Travelers had failed to prove its equitable subrogation claim, by failing to carry its burden on three of the eight elements necessary to prove equitable subrogation.

Travelers appealed.

The Appeal

On appeal, Travelers argued that the trial court essentially “led it astray” by granting its two motions in limine seeking to exclude evidence or argument that damages should be allocated or apportioned in proportion to the seven subcontractor’s allegedly defective work and to exclude evidence or argument regarding whether the work of the seven subcontractors was defective or caused damage.

Relying on the trial court record, the Court of Appeals found Traveler’s argument on appeal to be “untenable,” finding that while Travelers chose to frame its case as an “all or nothing” joint and several liability claim, nothing precluded the seven subcontractors to challenge the premise of Traveler’s assertion as framed, and nothing precluded the trial court from rendering a decision on the subcontractor’s challenge to this assertion.

As to the three elements that the trial court found that Travelers had failed to carry its burden of proof on, the Court of Appeal explained that the eight essential elements of an insurer’s cause of action for equitable subrogation are:

  1. The insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer;
  2. The claimed loss was one for which the insurer was not primarily liable;
  3. The insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable;
  4. The insurer has paid the claim of its insured to protect its own interest and not as a volunteer;
  5. The insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer;
  6. The insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends;
  7. Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and
  8. The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

In this instance, explained the Court of Appeal, the trial court found that Travelers had failed to satisfy its burden on three of the eight elements necessary to prove equitable subrogation, namely, that: (1) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (2) Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (3) The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

The Subcontractors Were Not “Primarily Liable” for the Defense Costs Travelers Paid to Pulte

As to whether Travelers had met its burden of showing that it had compensated the insured (Pulte) in whole or in part for the same loss for which defendant (the seven subcontractors) were “primarily liable,” The Court of Appeal held that while Travelers (on behalf of its insured subcontractors) may have reimbursed Pulte for its defense costs, it does not follow the the seven subcontractors were “primarily liable” for the defense costs Travelers reimbursed to Pulte, since the  subcontractors worked on different houses and each of the subcontractors were only obligated contractually to defend Pulte with respect to claims involving their respective “performance of work.”

Importantly, the Court of Appeal drew a distinction between an insurer’s obligation to defend an insured even if claims only potentially involve the scope of work of its insured, which is based on policy considerations, as opposed to a subcontractor’s obligation to defend a general contractor under an indemnity provision, which is based on contract. And, here, under the indemnity provision contained in the subcontractors’ subcontracts with Pulte, the subcontractors only agreed to defend Pulte for claims arising from their respective “performance of work.”

The Subcontractors Were Not in an Equitable Position That Was Inferior to That of Travelers

This distinction, between “policy” considerations when it comes to an insurer’s obligation to defend an insured, and a subcontractor indemitor’s obligation to defend a general contractor indemnitee under a “contractual” indemnity provision, also, held the Court, supported the trial court’s finding that Travelers had failed to show that justice required that the loss (Travelers’ payment of Pulte’s defense costs) be entirely shifted from Travelers to the seven subcontractors because their equitable positions were inferior to that of Travelers.

While noting that “there is no facile formula for determining superiority of equities,” the Court of Appeal noted that cases examining the issue had found that an insurer in a “superior position” generally involved a situation where the insurer’s insured contractually agreed to indemnify another, and that the party in the “inferior position” usually involved a party who both contractually agreed to defend the insurer’s insured and who was also performing in whole or in part the work agreed to be performed by the insurer’s insured. In other words, the typical case where a general contractor subcontracts its scope of work in whole or in part to a subcontractor. In such a situation, the general contractor’s insurer would be in the “superior position,” and the subcontractor would be in the “inferior position” because, while the general contractor agreed to indemnify the project owner, the work alleged to be defective was performed by the subcontractor:

Significantly, Travelers is seeking to shift to respondents costs for defending Pulte against claims unrelated to the scope of respondents’ work—claims for which respondents did not promise to indemnify and defend Pulte. Respondents’ failure to comply with their contractual obligations to indemnify and defend Pulte for claims arising from their own work could not make them liable for losses due to the work of other independent subcontractors. Equitable subrogation allows a loss to be shifted from one who was legally liable to another who is more responsible for the same loss. Here, Travelers is trying to shift the loss jointly and severally to respondents who were each liable for only a portion of the total loss.

Finally, as to the trial court’s finding that Travelers had failed to carry its burden that Travelers’ damages were in liquidated sum, the Court of Appeal held that its holding on the two elements of equitable subrogation made it unnecessary to consider this third element.


So, there you have it. An insurer’s obligations under an insurance policy is different than an indemnitee’s obligations under an indemnity provision. While one is based on policy consideration the other is based on contract. And while both can be broad, they’re not the same.

Carrier Has Duty to Defend Claim for Active Malfunction of Product

Tred R. Eyerly | Insurance Law Hawaii

   Rejecting that the underlying claim was based solely on faulty workmanship, the Third Circuit held the insurer had a duty to defend allegations of a malfunctioning product. Nautilus Ins. Co. v. 200 Christina Street Partners LLC, 2020 U.S. App. LEXIS 22118 (3d Cir. July 16, 2020).

    The insureds were sued by homeowners in two separate suits alleging defects in the construction of their homes. Nautilus defended under a reservation of rights. Nautilus filed suit in District Court and moved for judgment on the pleadings. The District Court denied the motion, finding Nautilus had a duty to defend because the underlying claims sufficiently alleged product–related tort clams that could fall within the scope of coverage under the relevant policies.

    The Third Circuit affirmed. There was a distinction between a claim of faulty workmanship, for which the insurer did not have a duty to defend, and a claim of “active malfunction” of a product, for which an insurer did have such a duty. An active malfunction was sufficiently fortuitous as to constitute an “occurrence.”  

    Nautilus argued that the underlying claims stemmed from the insureds’ alleged faulty workmanship, so the defects alleged were not “occurrences.” Liberally construing the underlying complaints in favor of the insureds, however, the complaints alleged the use of faulty materials, and the active malfunction of products, such as windows and moisture barriers. These active product malfunctions constituted “occurrences” under the policies. Thus, the District Court properly held that Nautilus had a duty to defend the underlying cases. 

Be Prepared When Accidents Strike

Clark Samuelson | Framing Issues

If you work in the construction industry, there’s a good chance that you have heard a heartbreaking story about an accident that occurred at a construction site which resulted in serious injury or death to one or more construction worker(s). Unfortunately, these accidents are a reality in the construction world and can happen even if there is no negligence or mistake by the general contractor or subcontractors. However, amid the calamity and uncertainty, there are some basic steps that everyone can and should follow to protect you and your company.

First and foremost, call the appropriate authorities. If you are present and not involved in the accident, notify the paramedics immediately to ensure that those involved get medical attention as soon as possible. If you are involved in the accident, check yourself for injuries that may need tending to and then call the paramedics so you and anyone else involved get medical attention as soon as possible.

Second, contact your supervisor and inform him/her of the accident. If you are the supervisor, contact your attorney or in-house legal representative. Your representative has likely handled many situations like the one you find yourself in and can walk you through what steps to take. This frees you up to focus on yourself or anyone else that may be injured and need your attention. It also frees you up to start compiling information – such as creating a list of potential witnesses – that may prove important in any investigation that follows.

Third, if the accident results in hospitalization, amputation, or loss of an eye, employers are required to report the accident to the Occupational Safety and Health Administration (OSHA) within 24 hours. If the accident results in a death, the accident must be reported to OSHA within 8 hours. (

Finally, you want to ensure that you and your company are prepared in the event that OSHA launches an investigation into what happened. Some simple steps to follow include preserving all records, documents, employee files, and/or correspondence which may be relevant to the accident. Following these simple steps can help protect you and your company in the event that tragedy strikes. If you do find yourself in this kind of situation or have any questions about to how to respond to an accident, the KRCL Team has significant experience assisting clients in navigating these types of situations.