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The Law and the 'Stick'

October 21, 1990

Bill Griffeth's article, "Cure for Terribly Slow Ivan: The Carrot and Stick" (Sept. 9), illustrates one of the potential problems householders may face when dealing with construction contractors. Fortunately for Griffeths, his carrot and stick, the "bonus/penalty clause," appears, eventually, to have worked. Unfortunately for other householders, the bonus/penalty clause will not work.

While the general concept of the bonus/penalty clause is sound, one must be careful to apply it so as not to render it unenforceable in the eyes of the law. The "penalty" portion of the bonus/penalty clause, more appropriately termed a liquidated damages clause, liquidates or defines in advance the damages the householder will suffer in the event the contractor fails to complete the project on time.

To be enforceable, the amount of liquidated damages must, at the time it is made, be a reasonable estimate of the actual damages the householder will suffer as a result of unexcusable contractor delay. If the amount of liquidated damages is construed to be a penalty rather than a reasonable estimate of householder damages, the clause will not be enforced.

Part of the folklore of the construction industry is that there must be a bonus side to the bonus/penalty clause in order for the liquidated damages clause to be enforceable. This is not the case. While a householder may wish to include a bonus clause to encourage early project completion, such a clause is not necessary to render the liquidated damages clause enforceable.

To avoid undue delays in collecting liquidated damages from their contractors, householders should insist that a retainage clause also be included in their contracts.

This clause allows householders to withhold or retain a certain percentage (commonly 10%) of the contractor's monthly progress payments until such time as the project is finally completed. If certain liquidated damages are actually forthcoming, they may be withheld from the contractor's final payment, thus forestalling the possibility that the householder will have to hound and possibly not ever collect those damages from the contractor.

Griffeths was indeed fortunate in his dealings with Ivan; but not just because he used his carrot and stick. Although he was eventually able to collect his $1,100, had Ivan known the law and had the $1,100 been construed to be the penalty he called it, Griffeths may not have been able to recover at all.

DAVID M. LEISHMAN

Salt Lake City

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