Kansas Construction Projects: Liquidated Damages or Unenforceable Penalty?

In a case handed down by the KS Supreme Court a few years ago, the Court effectively ruled that, in Kansas, liquidated damages will be strictly enforced without regard to whether or not they are later found to be excessive in relationship to what the damages for delay actually were.  See, Carrothers Const. Co., L.L.C. v. City of South Hutchinson, 288 Kan. 743 (2009).

In Carrothers, the issue for the Court boiled down to whether it was legally correct to look back “retrospectively” at the liquidated damage amount in a construction contract, after the fact and upon conclusion of a project, to determine if the damages were in effect “penalties” rather than damages. Generally, penalties are not allowed in contract law and are unenforceable.

In the past there had been differing results in the lower Kansas Appellate Courts where some had allowed a “look back” to determine if the liquidated damages, in hindsight, had a reasonable relationship with the actual damages incurred due to the delays. Other Appellate Courts had not allowed the “look back.”

In the Carrothers Construction case the Kansas Supreme Court put these differing lower court holdings to rest stating that no longer would Kansas courts allow a “retrospective analysis” to determine whether the liquidated damages were a penalty, overruling any prior holdings to the contrary by the lower courts. For all future analysis of liquidated damages, only a “prospective analysis” of whether the liquidated damages are reasonable at the beginning of a contract will be allowed.

In the Carrothers Construction case, the parties agreed the project was completed late. The issue was whether the liquidated damages were fair. Carrothers argued the City had not been damaged due to the late completion because the City was able to continue to operate in its existing facilities while the new facility was being completed. In other words, Carrothers argued the City really suffered no damages and to assess liquidated damages would, in effect, be a penalty.

The Court left no doubt that in Kansas, between consenting, legally sophisticated, otherwise equal parties, liquidated damages will be strictly enforced. No longer would Kansas courts look back, at the conclusions of a construction project, to make a determination whether the damages as actually applied were a penalty. Provided the liquidated damages are a reasonable estimate of what the damages might possibly be, as determined when the parties agree to the liquidated damages in the contract, they will be enforced, period.

But a word of parting caution…this is Kansas law only and other states differ. On top of that, the location of a construction project is not necessarily the state law that may apply. Many contracts contain a choice of law clause, which may dictate what state law applies to that specific contract. As usual the best advice is to seek the advice and counsel of a good construction lawyer to review the terms of the contract before the contract is signed, and certainly when faced with being assessed any type of damages, including liquidated damages for delay.