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June 18, 2025
Is an agency entitled to collect Liquidated Damages if the contract has been terminated for convenience?
Black’s Law Dictionary defines it Liquated Damages, as follows:
A provision, that determines in advance, the measure of damages if a party breaches the agreement and will generally be upheld, unless, the agreed-upon sum is construed as a penalty, for one of the following reasons:
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The sum grossly exceeds the probable damages from the breach
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The same sum is made payable to a variety of other breaches
Liquidated damages in construction, particularly for government contracts, are pre-determined amounts specified in the contract that a contractor must pay if they fail to complete the project within the agreed timeline. This provision compensates the government for potential losses due to delays, such as increased administrative costs or loss of public use. Unlike penalties, liquidated damages must be a reasonable estimate of anticipated damages at the time of contract formation, ensuring they are enforceable and not punitive under contract law.
The question of whether an agency is entitled to collect liquidated damages (LD) if a contract is terminated for convenience before completion hinges on the specific terms of the contract and the interpretation of those terms by courts. The concept of liquidated damages involves a pre-determined amount of compensation that is to be paid if a specific breach occurs, which is agreed upon at the time the contract is formed. This is distinct from general damages, which are not predetermined and are calculated based on the actual loss suffered due to the breach.
In the case of Shelter Prods., Inc. v. Steelwood Constr., Inc., 1 the court addressed a situation where a contract was terminated for convenience, and the party that terminated the contract sought to offset amounts owed with costs incurred in repairing defective work done by the subcontractor prior to termination. The court concluded that, under the circumstances, the party terminating the contract for convenience was not entitled to an offset for the cost of curing any alleged default because it had not given the subcontractor an opportunity to inspect and cure any alleged defects. This suggests that terminating a contract for convenience may limit the ability to claim liquidated damages related to performance issues that could have been rectified had the contract not been terminated.
Furthermore, the court noted that there is some persuasive authority from other jurisdictions supporting the view that, where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default. This aligns with the principle that liquidated damages are meant to compensate for breaches that occur under the terms of the contract, and a termination for convenience changes the context in which performance issues are addressed.
It's important to note that the enforceability and applicability of liquidated damages clauses depend on the specific language of the contract and the circumstances surrounding the termination. Contracts may specify different outcomes for termination for convenience versus termination for cause, and the rights and obligations of the parties can vary significantly based on those terms.
In summary, while liquidated damages are designed to provide a predetermined compensation for breaches of contract, their applicability in situations where a contract is terminated for convenience before completion depends on the contract's specific provisions and the nature of the breach. The case of Shelter Prods., Inc., illustrates that terminating a contract for convenience may affect the ability to recover liquidated damages, especially in situations where the alleged breach could have been remedied if the contract had not been terminated.
The question of whether an agency is entitled to collect liquidated damages (LD) if a contract is terminated for convenience before completion hinges on the specific terms of the contract and the interpretation of those terms by courts.
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Agency Discretion
Kirk Buffington
