Print Friendly, PDF & Email

The liquidated damages (LD) provision in a federally funded contract to re-stripe an interstate highway was held to be enforceable against the contractor that failed to complete a project on time. When the Montana Department of Transportation (MDT or MDOT) assessed and withheld liquidated damages, the contractor filed suit asking the court to declare the contract was one of adhesion that it could not negotiate and that the LD clause was unconscionable, against public policy, and unenforceable. In rejecting the contractor’s arguments, the trial court granted a motion by the MDOT for summary judgment that was sustained on appeal, on the basis that LD contract provisions were required by Federal Highway Administration (FHWA) regulations applicable to the project and should have been within the contractor’s reasonable expectations, and they were not otherwise unconscionable or legally unenforceable.

In Highway Specialties, Inc. v. State of Montana, 351 Mont. 527, 215 P.3d 667 (2009), the re-striping contract required the contractor to complete re-striping 575 miles of highway in northeastern Montana before the winter because of safety concerns and reduced visibility during the winter months making it important to have new lines and symbols on the road. A liquidated damages clause stated that “liquidated damages will be assessed in the form of a daily charge for each day” beyond the scheduled completion date of August 15, 2003. This clause further provided that “the daily charge will be determined from the Schedule in the Standard Specification Article 108.08 under fixed date.” According to that Schedule, the daily rate was $387 for projects with a contract sum between $100,000 and $500,000.

In the contractor’s litigation to recover from the state the LD’s withheld due to late completion of the work, the contractor made three primary arguments. These were that (1) the LD provision was unconscionable because it was a contract of adhesion — being a take-it-or-leave-it contract with no meaningful opportunity to negotiate the terms and (2) the LD’s were disproportionate to the state’s actual damages.

In response, the state argued that the contractor was a sophisticated and experienced contractor who knew what the contract provided and had the opportunity to discuss the terms – but that in the final analysis federal law required the LD clause to be included in the contract and the contractor therefore had to accept it. Moreover, the contractor had performed numerous similar contracts and acknowledged knowing about the provision.

The appellate court analysis considered the fact that the LD rates were subject to FHWA approval and had to be reviewed by the state at least every two years for reasonableness. The court stated that just because the LD clause was required by federal regulation does not mean it will automatically be enforced. Instead, the court will consider public policy and common law principles of the state to determine whether the clause is unconscionable and unenforceable.

In this case, the court concluded that it was not necessary to address whether it was a contract of adhesion because even if were, the contractor “cannot establish that the contract’s terms were not within its reasonable expectations, unduly oppressive, or against public policy. . . .” The court states “The clause will only be deemed unconscionable if it is a contract of adhesion AND if the contractual terms were unreasonably favorable to the drafter, which is generally determined by whether the provision was within the reasonable expectations of, or unduly oppressive to, the weaker party.” Based on the facts reviewed, the court concluded that the daily rate assessed was not unduly oppressive, the provision was within the contractor’s reasonable expectations, and the provision was not otherwise unduly oppressive.

Comment: The contractor in this case offered evidence to demonstrate the actual amount of damages incurred by the state DOT, and it argued that the amount of LDs was punitive for exceeding by three times the amount of actual damages. The trial court didn’t address this argument other than to state it was not credible because the contractor merely approximated what it thought the actual damages were rather than seeking from the state actual details of the damages. It should be noted, however, that the concept of LD’s is that they are to be used as the measure of damages in situations were it may be difficult to calculate and determine actual damages. Even if a contractor could demonstrate that its client incurred actual damages less than the LD amount, this does not generally mean the LD clause would be found unconscionable due to a punitive nature. In this case, for example, the court explained that there were other less financially tangible factors to consider such as the safety of the public driving on the road that was not re-striped prior to the winter. Those types of subjective damages are appropriate for inclusion in the LD rate.

Another point to emphasize is that just because a contractor may have no ability to negotiate the terms of the contract (as was the case here), this does mean the contractor can successfully argue that unfavorable terms of the contract should be unenforceable because the contractor had to take-it-or-leave-it. The contractor must prove more than the unequal bargaining position and take-it-or-leave-it nature of the contract. It must prove that the terms of the contract were so oppressive as to be contrary to law or public policy. That is generally a tough matter to prove. This should be carefully considered before a contractor signs a contract intending to later argue that it should be excused from unfavorable terms because it had no choice but to sign the contract as-is.

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 12 No. 4 (April 2010).