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Monday, March 30, 2009
Friday, March 20, 2009
Liquidated Damages
Liquidated Damages is a dollar amount stipulated in a contract which the parties agree is a reasonable estimation of the damages that would be owed to one party in the event of a breach by the other party. Companies often rely on liquidated damages clauses to assure performance of the contract.
Since the amount of damages is often difficult to ascertain when there is a breach, a liquidated damages provision attempts to fix the amount. Even if the parties agree to a liquidated damages clause, the Court will only award the actual damages suffered if they can be ascertained. In theory, the clause also saves litigation time and legal fees.
WHEN VALID: The Commonwealth of Virginia recognizes liquidated damages clauses in contracts as valid under the following conditions: (1) The figure must be a reasonable amount contemplated at the time of contract to be the probable loss to the non-breaching party in the event of a breach; (2) The amount cannot be punishing or punitive damages, grossly in excess of the actual damages; and (3) The damages must not be susceptible of a definite measurement.
The Court examines the conditions at different times of the contracting parties' relationship. When looking at the first and third conditions, the court examines them from the time of the contract. The second is examined at the time of breach.
ACTION ADVICE: In order to improve the likelihood of enforcement of a liquidated damages provision, a contract clause should state that the opposing party waives their right to contest the enforceability of the liquidated damages clause. In Gordonsville Energy v. PEPCO (1999) the Virginia Supreme Court upheld such a waiver of rights provision.
INTERESTING NOTE: Virginia § 6.1-330.63 allows credit card companies to charge any amount of liquidated damages as late fees.
This brief article is only meant to provide a very broad overview and cannot be relied upon as a substitute for legal advise. Contact Gross & Romanick if you need information about your specific situation.
Since the amount of damages is often difficult to ascertain when there is a breach, a liquidated damages provision attempts to fix the amount. Even if the parties agree to a liquidated damages clause, the Court will only award the actual damages suffered if they can be ascertained. In theory, the clause also saves litigation time and legal fees.
WHEN VALID: The Commonwealth of Virginia recognizes liquidated damages clauses in contracts as valid under the following conditions: (1) The figure must be a reasonable amount contemplated at the time of contract to be the probable loss to the non-breaching party in the event of a breach; (2) The amount cannot be punishing or punitive damages, grossly in excess of the actual damages; and (3) The damages must not be susceptible of a definite measurement.
The Court examines the conditions at different times of the contracting parties' relationship. When looking at the first and third conditions, the court examines them from the time of the contract. The second is examined at the time of breach.
ACTION ADVICE: In order to improve the likelihood of enforcement of a liquidated damages provision, a contract clause should state that the opposing party waives their right to contest the enforceability of the liquidated damages clause. In Gordonsville Energy v. PEPCO (1999) the Virginia Supreme Court upheld such a waiver of rights provision.
INTERESTING NOTE: Virginia § 6.1-330.63 allows credit card companies to charge any amount of liquidated damages as late fees.
This brief article is only meant to provide a very broad overview and cannot be relied upon as a substitute for legal advise. Contact Gross & Romanick if you need information about your specific situation.
Wednesday, March 18, 2009
Construction Law: Payment Bonds
If your company is a subcontractor or supplier to a government project, you need to understand payment bonds. Some private jobs also utilize payment bonds. The federal statute generally applicable to payment bonds on federal projects is the Miller Act, with state and local statutes termed Little Miller Acts.
Payment Bonds Defined
Payment bonds are required on almost all federal, state and local construction projects. Federal and state laws require these bonds on public projects for the protection of the subcontractors, materialmen and suppliers against insolvent or defaulting contractors and subcontractors. Although no legal requirement exists regarding privately owned construction projects, payment bonds are frequently required by owners and lenders.
The bonding relationship is as follows: The "principal" is the general contractor or the subcontractor whose work is being bonded. The "surety" is usually an insurance company that is standing behind the principal. If the general contractor is the principal, the "obligee" is the owner of the project. If the subcontractor is the principal, the "obligee" is the general contractor. The "claimant" is the subcontractor, materialman or supplier seeking payment from the bond.
Who is Covered, and What is Covered
Payments bonds posted by a general contractor will always cover the subcontractors, materialmen and suppliers who have a direct relationship with that general contractor. On public projects, a general contractor may be required to have its subcontractors post payment bonds; in such a case, sub-subcontractors, materialmen and suppliers to those subcontracts will then be covered by the bonds of those subcontracts. In addition, on both public and private projects, the terms of a payment bond itself might extend coverage to include suppliers and materialmen who would not generally be covered.
The terms of a payment bond along with any applicable statutes define the extent of the bond's coverage. The typical payment bond coverage is for labor and materials furnished for use on contract projects. Numerous factors are considered by the courts in determining coverage, including the relationship of the parties, the nature of the product or labor provided and the cost of the work or materials relative to the overall project. Such an analysis is complex.
Notice Requirements
Notice of a bond claim to the principal and surety needs to be done within prescribed time limitations in order to pursue a claim. The terms of the payment bonds on both public and private projects typically contain strict time requirements for giving notice, as well as time limitations on when suit must be filed. Furthermore, federal, state and municipal statutes will set strict time deadlines.
For state projects in Virginia, the applicable statute is Virginia Code Section 11-60B. This section bars suits or actions under certain circumstances on a payment bond unless the claimant had given written notice to the principal and surety within 180 days after it performed the last of the work or labor or furnished the last of the materials for which the claim was made.
Summary
Before you begin a job, get a copy of the bond that covers the project in order to determine whether you are covered and how to enforce your rights. Notices of your claim must exactly track the bond and applicable statutes. Legal enforcement is never simple, since the principals and sureties typically assert every available defense.
This brief article is only meant to provide a very broad overview of the complex area involving payment bonds and cannot be relied upon as a substitute for legal advise. Contact Gross & Romanick directly if you need information about your specific situation.
Payment Bonds Defined
Payment bonds are required on almost all federal, state and local construction projects. Federal and state laws require these bonds on public projects for the protection of the subcontractors, materialmen and suppliers against insolvent or defaulting contractors and subcontractors. Although no legal requirement exists regarding privately owned construction projects, payment bonds are frequently required by owners and lenders.
The bonding relationship is as follows: The "principal" is the general contractor or the subcontractor whose work is being bonded. The "surety" is usually an insurance company that is standing behind the principal. If the general contractor is the principal, the "obligee" is the owner of the project. If the subcontractor is the principal, the "obligee" is the general contractor. The "claimant" is the subcontractor, materialman or supplier seeking payment from the bond.
Who is Covered, and What is Covered
Payments bonds posted by a general contractor will always cover the subcontractors, materialmen and suppliers who have a direct relationship with that general contractor. On public projects, a general contractor may be required to have its subcontractors post payment bonds; in such a case, sub-subcontractors, materialmen and suppliers to those subcontracts will then be covered by the bonds of those subcontracts. In addition, on both public and private projects, the terms of a payment bond itself might extend coverage to include suppliers and materialmen who would not generally be covered.
The terms of a payment bond along with any applicable statutes define the extent of the bond's coverage. The typical payment bond coverage is for labor and materials furnished for use on contract projects. Numerous factors are considered by the courts in determining coverage, including the relationship of the parties, the nature of the product or labor provided and the cost of the work or materials relative to the overall project. Such an analysis is complex.
Notice Requirements
Notice of a bond claim to the principal and surety needs to be done within prescribed time limitations in order to pursue a claim. The terms of the payment bonds on both public and private projects typically contain strict time requirements for giving notice, as well as time limitations on when suit must be filed. Furthermore, federal, state and municipal statutes will set strict time deadlines.
For state projects in Virginia, the applicable statute is Virginia Code Section 11-60B. This section bars suits or actions under certain circumstances on a payment bond unless the claimant had given written notice to the principal and surety within 180 days after it performed the last of the work or labor or furnished the last of the materials for which the claim was made.
Summary
Before you begin a job, get a copy of the bond that covers the project in order to determine whether you are covered and how to enforce your rights. Notices of your claim must exactly track the bond and applicable statutes. Legal enforcement is never simple, since the principals and sureties typically assert every available defense.
This brief article is only meant to provide a very broad overview of the complex area involving payment bonds and cannot be relied upon as a substitute for legal advise. Contact Gross & Romanick directly if you need information about your specific situation.
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