You can find these legal terms when handling construction contracts and bonds. The performance bond request and offer forms often ask about “Liquidated Damages.” Does this refer to maritime contracts?
A typical Performance Security form may not mention liquidated damages, whether they are covered or excluded. So why does the bond request ask for this detail?
Let’s start by identifying the parties involved
The contractor requesting the bond is the principal. They would be the defendants in a lawsuit related to bail.
The owner of the contract, the party protected by the surety, is the obligee. In that lawsuit, the obligee would be the plaintiff, filing a lawsuit against the principal and the surety of the surety.
The third of all these transactions is the surety or surety company.
Tied contracts can be between the project owner and a general contractor (CG), or between the CG and a subcontractor (subcontractor). We mention this because sometimes issues and complaints “trickle down” from one contract to another and then to the link.
What does a performance guarantee cover?
The language of the link is specific. But remember, it is a guarantee of the contract you are referring to. Construction contracts generally establish liability for contract delays, unanticipated expense increases, and other financial losses that may be attributable to the contractor’s actions or inactions. It is through the language of the contract that the surety is liable for such losses. For this reason, damages are always a problem for bond underwriters. Let’s learn enough about them to be dangerous.
Liquidated damages (also called proven damages) are damages the amount of which the parties designate during the formation of the contract for the injured party to collect as compensation for a specific breach (such as late performance). Such penalties for not completing on time can run into the thousands of dollars a day and therefore can deter a surety from backing up the contract.
It is not uncommon for general contractors (GC) to pass the liquidated damage penalty in their contract to the subcontractors below them. The concern is that the subcontractor’s lack of performance could jeopardize the timely completion of the entire project.
When the parties contract the payment of damages, the clause will be enforceable if it implies a genuine attempt to quantify a loss in advance and is a good faith estimate of the economic loss.
Actual damages In a case of breach of contract, the prevailing plaintiff may be entitled to actual or compensatory damages.
Actual damages can be divided into direct and consequential damages.
Direct damages naturally result from the wrongful conduct of the accused. The defendant will have anticipated the damages that would result from the breach. The benefit of the deal that is directly and strictly tied to the contract is a measure of direct damages.
Consequential damages result naturally, but not necessarily, from the wrongful conduct of the defendant. The consequential damages must be foreseeable and directly attributable to the breach of the contract. Loss of profits, loss of sales, incidental damages, and most other Performance Bonds damages are indirect damages.
Consequential damages (also sometimes referred to as indirect or special damages) may be recovered if it is determined that such damages were reasonably foreseeable or “within the contemplation of the parties” at the time the contract was formed. This is a factual determination that could lead to the contractor’s liability for a huge loss. For example, the cost of completing unfinished work on time can pale in comparison to the loss of operating income that a homeowner could claim as a result of late completion.