Years ago I was told by a builder that I was employed with (former architect): If a contract states that a contractor is to be penalized every day work is unfinished beyond a set completion date, the contractor, by law, is entitled to a bonus, equal to the penalty, for days the project is finished ahead of the completion date.
I understand that the contract doesn’t have to specify the bonus it’s just implied with the penalty clause.
Now I don’t have access to my states laws to confirm this, but would like to know if it’s true and is it common through all the states?
I’m in Michigan by the way.
Scott R.
Replies
I'm not a lawyer, and it has been several decades since I had a course on contracts, but I would seriously doubt that in most (all?) states you would be entitled to a bonus unless it was spelled out in the contract.
Not in Virginia. Sounds like your builder was doing some wishful dreaming.
PAHS Designer/Builder- Bury it!
Agreed with above.
If it ain't in the contract, it hard to argue that an assumption is contractual.
Now, just for perspective, whenever I've had a client suggest a penalty clause, I've always been agreeable if they match the penalty with a early completion bonus.
Not once has the subject seen further discussion. Funny how that works.
McDonnell: "Now, just for perspective, whenever I've had a client suggest a penalty clause, I've always been agreeable if they match the penalty with a early completion bonus. Not once has the subject seen further discussion. Funny how that works."
I'm still a contractor of sorts (but only on engineering projects these days), but here's a perspective from the other side of the fence:
I've advised several friends about remodeling contracts. Rather than ask for a bid price with a $100/day penalty clause (or propose a penalty clause after the bid is presented), I suggest the homeowner do the following.
The bid is $20,000. Has to be done in 16 weeks (baby on the way). When getting the bid, HO asks GC, "How long to finish? Time is important to us." GC says 6 weeks. HO proposes, "How about a bonus/penalty clause of $500 a week if early/late for completion at 10 weeks? (note the longer time)! Finish on time and you get $22,000."
That's $2,000 free money to GC for on-time. $3,000-4,000 of free money if he really cranks. He accepted. But project wasn't on time. Went over by 3 weeks. Benefits to HO: They saved $1,500. And, since GC knew he was losing money each week, their project got the crew while others' projects languished.
But I think it was a balanced contract, with both a stick and carrot. The homeowners would have been happy to pay the bonus and were thankful I insisted on the stick (I was the bank).
David Thomas Overlooking Cook Inlet in Kenai, Alaska
Sounds reasonable David.
The bottom line on inserting language that calls for any penalty/bonus is it turns the contract into a "time is the essence" agreement.
Deadly to someone producing a product with raw materials that are delivered to a private property, usually at the mercy of the weather, acts of God, ect.
Deadly to a Building Contractor. Not deadly to a defense contractor building cruise missles in a climate controled factory.
Never, never be tempted to accept an early completion clause. If there is a product failure, an accident, anything that would appear to a jury that the reason for the "tragedy" was becaused you rushed for the sake of profit. Deadly.
"would appear to a jury"
And therein lies another advantage of a performance/penalty clause or an agreed upon liquidated damages amount. At least there's nothing to go to the jury regarding schedule. You've already decided what the answer will be.
But I agree that the temptation/perception of doing bad work to make the date is increased. Obviously, only a well-specified job could be done with a performance clause. And independent milestones for completion (e.g. city inspector sign-offs). Design-as-we-go jobs wouldn't work.
I've made a ton of extra money on some performance clauses. And sometimes lose some. But in general they make the job more interesting to me.David Thomas Overlooking Cook Inlet in Kenai, Alaska
Not in PA law or NY law or common law.
Sounds like one of those wishful thinkin' kind of things to me.
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I thought that it was sorta of the oposite.
That penalty clause was not enforcable unless there was a corresponding bonus clause.
My memory is certainly fading after all these years, but Bill Hartmann’s response sounds more plausible and may be actually what my employer was telling me.
“That penalty clause was not enforceable unless there was a corresponding bonus clause”.
Any thoughts on this?
McDonnell quote “Now, just for perspective, whenever I've had a client suggest a penalty clause, I've always been agreeable if they match the penalty with a early completion bonus.
Not once has the subject seen further discussion. Funny how that works.”
Been their done that and it is quite humorous how nobody pursues the matter any further.
Scott R.
Well, to me, Bill Hartman's reply sounded like what would be fair, and nice, and right, but I thought you were pursuing answers about what is the law.
Law is very specific and not always fair and nice and right, in line with our dreams. if you want a specific item in your contract, put it in instead of playing guessing games. If you are going to depend on the answer to this question, get the answer from your attorney. At least you can kick him in the seat of his pants if he advises you wrong..
Excellence is its own reward!
Well piffin by that condescending response guess I need to clarify that I did not post the question to depend on responses as genuine legal counsel, and your insinuation that I am dimwitted enough to do is eminent.
The topic of a penalty clause came up in discussion so thought I would defer to the brain trust of Breaktime to see if what I heard many years ago COULD be true. Having an attorney research the correct answer would certainly provide a definitive answer but I don’t have the funds to ask just out of curiosity questions at $200 an hour.
I highly respect the individual from whom this "vague" information came, so from my perspective the probability of it being true was fairly good, hence inquiring specifically regarding the law. As I alluded to in a previous post, what I was told and what I remember could be two different things. Just a harmless question... Relax!Scott R.
Don't know what I wrote that came off as condecending, but my impression of your comments was that you appeared to be looking for the answer you were looking for and not any brain trust info. You were choosing to lean toward believing the one vague comment that appeared to agree with you mentor in opposition to all the other comments shared in answer to your query.
I was just trying to correct your prejudicial thinking.
Sorry to have helped..
Excellence is its own reward!
Scott - interesting - I didn't see any condescension in his answer - just plain old common sense.
_______________________
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Scott: I can imagine how you might have seen Piffin's post in a negative light, but I've probably read a few thousand more of his posts than you have. I'm pretty sure he was just trying to point out the consensus of most people here is:
Sorry, unless they had a gun to your head at the signing, a penalty clause would be enforceable with or without a bonus clause.
That consensus, of course, coming from a bunch of non-lawyers (who however have been around the block a few times) and a few lawyer wanna-bes. As you knew.
P.S. You must live in a small town like I do if lawyers are only $200/hour!
On that point, for your enjoyment: http://www.dilbert.com/comics/dilbert/archive/dilbert-20031126.html
David Thomas Overlooking Cook Inlet in Kenai, Alaska
OK Guys, I re-read mine again and I see that I wrote with some brevity (for me) and maybe came across as short in my concise choice of words. Today, I am winding down from an all-nighter getting that slab poured. The weather finally came off just right and the temps ran up around 40°F or so. Tucked her in under the blankets and got home by 4AM again.
So I may have been less than tacvtfull and careful in my choice of words.
Tho I will stand behind my impression that Scott wanted to hear more opinions that agreed with his mentor.
Peace, Scott?.
Excellence is its own reward!
Piffin, no harm no foul.
I’ve come to respect your input on this message board; It was the “playing guessing games” that was the trigger. J
As responses were coming in I had thoughts of contacting my mentor, not only to clarify the topic from his perspective but also to hear about the eccentric project he and his crew were currently tackling. We’ve kept in contact over the years, mostly me calling him to get an opinion on tough situation. The timing is right for me to “check in” and get the latest info. His incredible knack for design, use of materials and incorporating unusual construction methods was something I would question about for what could have easily gone on for hours. There was much information from him I did actually take to the bank, so I would be surprised if a kernel of truth doesn’t exist regarding my understanding of this topic. Keep in mind the fault of the facts likely does not exist with the source just my representation from the source.
However this will forever remain a mystery. The day following my last response in this thread, I got the very saddening news that we would be laying my friend to rest on Saturday.
Terry Johnson, Ar-Tek Construction 1943-2003
I often sign contracts with a liq. damages clause. They are usually $70.00 t0 a $100.00 a day over completion date (contract value $200k - $400k)
They are simply an incentive to stop wayward builders from dragging out a project for whatever reason.
If I have delays, variations, bad weather etc. I write to the Architect and request an extension of time. I never been penalized and don't expect to be even when a few weeks or month over time. The Architects don't what to enforce it I think its just peace of mind for the client.
I would never sign a contract with a penalty clause where no third party is administrating the contract, you would be asking for trouble.
cheers johnhttp://www.johnwalkerbuilders.com
I confess I'm hazy on this stuff now, but as I recall, "penalty" clauses are often considered unenforceable, at least to the extent they are considered "punishment" as opposed to compensation.
A basic principle of contract law in the US and common-law countries is that the parties are free to set the terms of the contract within the overall constraints of public policy.
Think of a contract as a private law between the two parties.
So long as each of the parties have at least some bargaining power (i.e., not a take it or leave it sort of situation - or mega corp v consumer) the courts will give them wide leeway to decide on the terms of the "law," that is, the contract, between them.
Also, if I remember correctly, those "penalty clauses" are technically called "liquidated damages" clauses - and there is a set of "rules" for distinguishing enforceable liquidated damages clause from unenforceable penalty clauses.
As for the quid pro quo concept - that is a basic requirement for contracts to be found enforceable - aka "consideration." But "consideration doesn't have to be proportionate - as long as each side gets something out of the deal ("In consideration of $1.00, one dollar, receipt of which is hereby acknowledged" - a "famous" consideration weasel) the contract will be "supported by adequate consideration."
But that's just the contract as a whole - there doesn't have to be an "internal balance" of the parts.
I still think that the original idea floated was someone's wishful thinking - about as close to the ways things are really done as if I were to design a nuclear sub.
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As I remember liquidated damages they have to be tied to real loss.
I put them in a couple of contracts (gov't) but had to justify the damage figure to our lawyers before they would put it inbobl Volo, non valeo
>>As I remember liquidated damages they have to be tied to real loss.
I think you're right on that, although there is a wrinkle on that.
One of the other rules I remember (at least from a CA case -which I remember because I got quizzed on it in class by one of the greatest of contracts prof's on this issue in Contracts 1 - Grant Gilmore - kind of like a physics student getting quizzed on relativity by Einstein {G}) is that a liquidated damages clause will only be enforceable if, prior to entering into the contract, the parties would have been unable to estimate what the extent of potential damages might be in the event of a breach.
Courts recognize that one aspect of a contractual relationship is to anticipate and allocate amd manage risk.
Because a liquidated damages clause doesn't tie the damages to the actual amount or extent of loss, courts will allow them only in narrow circumstances.
_______________________
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I'm matching tool donors to a church mission to Haiti - we're shipping a bus converted to a medical facility in January (we hope) and can fill it with clothes, tools and all sorts of stuff needed in that poorest of all countries. A few hand tools or power tools can provide a livelihood for an otherwise destitute family. Please email me if you have tools to donate.
lawyers
the clause we called liquidated damages was based on an estimate of what actual damages might be, as oppssed to determining actual costs after the fact.
one contract in particular i remember was a system for in proccesing supplies as they were delivered. had what we called a liquidated damage if the system wasn't repaired within a set time. the estimate was based on the gov't's cost of having to pay for trucks being lined up waiting to unload, and using the normal rate of trucks arriving at the facility.
this sounds like something u posted as not being a liquidated damage.
but that's what we called it and the type of thing we had to do to come up with a figure.
the lawyers were part of calling liquidated.bobl Volo, non valeo
One think to keep in mind on stuff like this is there are variations from state to state -some big, some small and insiginificant, some small and very significant!
_______________________
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I'm matching tool donors to a church mission to Haiti - we're shipping a bus converted to a medical facility in January (we hope) and can fill it with clothes, tools and all sorts of stuff needed in that poorest of all countries. A few hand tools or power tools can provide a livelihood for an otherwise destitute family. Please email me if you have tools to donate.
As a lawyer, I find the possibility of such a law existing to be unlikely. Granted, state law determines contract interpretation and I cannot possibly verify every state's contract law, but a general proposition that states the law will read into a contract penalty provision the exact opposite proposition (i.e. a bonus) would definitely not be the norm (and is not the law in the states in which I practice).
One would have to wonder, if by the same logic, a contract that provides for a bonus would be interpreted to levy a penalty should the contract not be completed on schedule?
The others are correct. This is just some wishful thinking. As a matter of fact, I just finished a project with a $150,000/day late clause (for substantial completion). The contractor would only have gotten an "atta boy!" if he had actually been early.
...that's not a mistake, it's rustic
"I just finished a project with a $150,000/day late " Please, do tell,, what type project was this one???. Thanks Jim J
Well, it was no Fine Home. More like a big hole. This was to construct an access shaft next to an existing tunnel. 70' deep under 60' of groundwater, with two active subways and an elevated rail line nearby to make things fun. Slurry walls, 400 ton tiebacks, rock blasting, and lot's of chemical grouting. The penalties are steep because the access shaft is on the critical path for follow on rock tunnelling contracts (TBM, drill-and-blast, and road header) that will run through the existing tunnel into Manhattan and haul the muck back into Queens.
I just got the go ahead to get the adjacent contract ready. This one will create a bigger hole for a future tunnel with a substation and vent plant. This big open-cut will first be used to launch soft-ground tunnel boring machines. The contract will also underpin a subway, an elevated transit line, and a busy truck route in one 100-foot segment. We may be using ground freezing to cutoff the groundwater in this one. This contract is also on the critical path, so similar delay clauses will be included....that's not a mistake, it's rustic
Wow,,yep, if I had to work with water 10' above my head, I'd go home to my bungalow too. thanks, Jim J
No! I don’t think there’s a law that states such a requirement. This would only be true if it’s explicitly stipulated in the contract; condition spelled out and agreed to by both parties before commencement of work. When there’s is no such stipulation and the contractor defaults, well that’s when the Lawyers or Arbitrators get called in.
The bonuses do not have to be equal to the penalty either. Usually a percentage over the losses or a fixed daily amount is used by the owner as a penalty. At the same time the bonus can be the same, more than the penalty or none at all, there is no rule. It’s all how it is written. A bonus is used to give the contractor an incentive to complete the project on time.
This sort of contract is generally not used, and when it is, it’s usually in bigger projects where the owner need the project completed at a certain time because of personal gain, potential losses or agreements to another parties where they have penalties or losses.
Contacts of this nature are usually completed on standard AIA (American Institute of Architects) documents; edited and reviewed by each parties council.
(You may want to look at a copy of AIA documents A101, A107 or A111 and all three in conjunction with General Conditions A201)
Keep in mind, if all the Contractors where required to pay for each time they don’t complete a project on time, there would not be too many contractors around.
Edited 12/11/2003 2:25:52 AM ET by specarch
A friend of mine told me that once, a long, long time ago, somebody actually finished a job ahead of schedule.
That is true.
It was Me.
and it was a LONG time ago.
;).
Excellence is its own reward!
Since we're now quoting scripture here: Genesis 2:1-2