Federal Court in PA Finds Liquidated Damages Provision Unenforceable Where the Per Day Liquidated Damage Amount Was Copied from Contracts for Prior Unrelated Projects Rather than a Project-Specific Forecast of Likely Damages

Troutman Pepper

Pepper Hamilton LLP

D.A. Nolt, Inc. v. The Philadelphia Municipal Authority, 2020 BL 199761 (E.D. Pa. May 28, 2020)

The Philadelphia Municipal Authority (the “Authority”) contracted D.A. Nolt, Inc. (“Nolt”) to renovate a building that would serve as the City’s new police headquarters. After Nolt had performed a portion of the renovation work, the Authority cancelled the project. Nolt sued the Authority, alleging that the Authority owed it $2.5 million for work performed before the project was cancelled. The Authority denied that payment was due, claiming that Nolt had delayed the project by 255 days and that a $10,000 per day liquidated damages provision in the contract thus offset Nolt’s claim.

Nolt moved for summary judgment on the Authority’s liquidated damages counterclaim. It argued that the provision was unenforceable because the $10,000 per day amount was not a reasonable forecast or approximation of the loss the Authority expected to suffer in the event of delay. Nolt cited testimony from the Project Director for the City’s Department of Public Property, who was responsible for finalizing the Authority’s contract with Nolt. The Director testified that he did not estimate the anticipated harm that might occur in the event of a delay in Nolt’s work. Rather, he determined that $10,000 per day was reasonable because prior City projects of a similar scope and magnitude included $10,000 per day liquidated damages provisions. The Director was not personally involved in the analysis which the City had undertaken on the referenced prior projects, and he did not personally analyze any of the calculations or estimates that the City completed for those prior projects.

The court noted the general principle that liquidated damages are enforceable only when they represent a “reasonable forecast” or “accurate pre-estimate” of the possible harm to the non-breaching party. Reviewing the Director’s testimony, the court concluded that the Authority did not base its $10,000 per day amount on a reasonable forecast of likely damages because the Authority, admittedly, did not actually attempt any estimate at all. The court found it unreasonable for the Authority to rely merely upon prior analyses undertaken for other projects that involved their own unique estimations of probable costs that could accrue in event of breach.

The Authority also attempted to justify the reasonableness of the $10,000 per day amount by noting that the Authority actually suffered $2.7 million in losses due to the delay. Thus, it argued, the comparable amount of liquidated damages ($2.5 million) was a reasonable approximation of the actual harm. The court rejected the argument. It found that a liquidated damages sum, which was not based on a reasonable forecast of actual damages at the time of contracting, cannot retroactively become reasonable merely because actual damages ultimately happen to roughly equal the liquidated amount.

To view the full text of the court’s decision, courtesy of Bloomberg Law, click here

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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