Considerations for Avoiding Waiving Contractual Rights to Collect Liquidated Damages

Liquidated damages clauses are inserted into contracts to establish a pre-determined amount of compensation to the non-breaching party where the damages may be difficult to calculate. A variety of circumstances may trigger liquidated damages, including when (1) a party fails to deliver goods on time (thereby causing a delay in production and/or lost sales); (2) a party abandons a lease before its expiration (thereby causing the owner to suffer lost rents and other costs until it obtains a replacement tenant); and (3) a contractor fails to complete a project on time (thereby delaying a new business location's opening and causing the owner to incur lost profits).

Like all contract provisions, the non-breaching party's words and/or conduct can waive liquidated damages provisions. To determine if a party has waived their ability to seek liquidated damages, courts consider (1) the contract's terms and whether the moving party provided notice of the event that triggered the liquidated damages (if the contract requires notice), (2) the parties' conduct, (3) contractual compliance for extensions, and (4) evidence of extension agreements.

The case U.S. Pipeline, Inc. v. N. Nat. Gas Co., 930 N.W.2d 460 (Neb. 2019) discusses the circumstances that can result in a waiver of rights to collect liquidated damages. In that case, the owner sought liquidated damages from the contractor after the contractor failed to complete the natural gas pipeline construction by the date of substantial completion specified in the contract. Rather than notify the contractor of its intent to enforce the liquidated damages clause, the owner worked with the contractor to develop a new schedule and directed the contractor to perform additional work after the deadline to achieve substantial completion. Importantly, however, the owner failed to provide the revised plans for the extra work for several weeks, thereby delaying the start of the extra work and causing further delays. The contractor performed the extra work and ultimately completed the project several months after the original deadline.

The owner sued the contractor for its delay in completing the project and sought to recover liquidated damages based on the total number of days the project was delayed (which an expert calculated to be a total of 141 days after the substantial completion date). The trial court denied the owner's claim for liquidated damages, explaining that the owner waived its right to liquidated damages. The Supreme Court of Nebraska affirmed the trial court's ruling, explaining that the owner's decision to request the contractor to perform extra work after the date of substantial completion, combined with the owner's failure to inform the contractor of its intent to seek liquidated damages, demonstrated that the owner intended to waive its right to these damages.

The court's ruling serves as a powerful reminder that parties can waive their right to recover liquidated damages. Parties seeking to enforce their rights to collect liquidated damages should consider immediately sending written notice of their intent to collect liquidated damages to the other party after it has breached the contract. However, subsequent communications between the parties concerning requests from the owner to the contractor to perform extra work, or about steps the breaching party plans to take to cure the default and/or to mitigate the non-breaching party's damages should be carefully drafted to avoid a claim that liquidated damages have been waived.