MILTON CONST. CO. v. State Highway Dept.
1990 Ala. LEXIS 667, 1990 WL 155158, 568 So. 2d 784 (1990)
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Rule of Law:
A contractual provision that imposes a monetary charge for delayed performance is an unenforceable penalty, not enforceable liquidated damages, if it is imposed in addition to a separate liquidated damages clause and its primary purpose is to coerce timely performance rather than to serve as a reasonable pre-estimate of damages.
Facts:
- Milton Construction Company, Inc. ('Milton') entered into two highway construction contracts with the State of Alabama Highway Department ('Highway Department') for projects on I-65 and I-59.
- Each contract contained a 'liquidated damages' clause that specified a daily charge to compensate the Highway Department for its administrative and engineering costs if the project was delayed.
- Each contract also contained a separate 'incentive/disincentive' provision, imposing an additional, larger daily charge for late completion, up to a maximum amount, which was explicitly stated to be 'in addition to' the liquidated damages.
- The stated purpose of the incentive/disincentive provision was to encourage the earliest possible completion of the project in the public's interest.
- The disincentive clause was a standard provision included in the bid documents by the Highway Department and was not a term negotiated between the parties as an estimate of potential damages.
- Milton completed both the I-65 and I-59 projects after their respective contract deadlines.
- For each project, the Highway Department withheld funds from Milton's payment under both the liquidated damages clause and the disincentive clause.
Procedural Posture:
- Milton Construction Company, Inc. filed a lawsuit against the State of Alabama Highway Department in an Alabama trial court.
- Milton sought a declaratory judgment that the disincentive clauses in two contracts were void and requested repayment of funds withheld by the Highway Department.
- The Highway Department moved for summary judgment.
- The trial court granted summary judgment in favor of the Highway Department.
- Milton appealed the trial court's judgment to the Supreme Court of Alabama.
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Issue:
Does a contractual 'disincentive' clause, which imposes a daily monetary charge for late completion in addition to a separate liquidated damages clause for the same delay, constitute an unenforceable penalty?
Opinions:
Majority - Houston, Justice
Yes, the disincentive clause constitutes an unenforceable penalty. A provision is a penalty if its purpose is to punish non-performance rather than to provide just compensation for a breach. Applying the three-part test from Camelot Music, Inc., the clause fails because: 1) the injury from delay was not difficult to estimate, as it was already covered by the specific liquidated damages clause and a general default clause allowing recovery of all costs; 2) the parties did not intend for the clause to provide damages, as its explicit purpose was to spur early completion; and 3) the stipulated sum was not a reasonable pre-breach estimate of probable loss, as the Highway Department conceded the amounts were set arbitrarily. The clause subjected the contractor to a double assessment for the same costs, resulting in disproportionate and unreasonable compensation, which is the hallmark of a penalty. Furthermore, the Highway Department's argument that Milton is estopped from this challenge fails because validity cannot be given by estoppel to a contract term that is void as against public policy.
Analysis:
This decision reinforces the traditional common law doctrine that distinguishes enforceable liquidated damages from void penalties. The court clarifies that it will look to the substance and function of a clause, not its label, to determine its true nature. By striking down a 'disincentive' clause that existed alongside a separate liquidated damages provision, the court establishes a strong precedent against double recovery for the same breach. This ruling serves as a caution to contract drafters, particularly government entities, that any stipulated damages clauses must be genuinely tied to a reasonable pre-estimate of actual, otherwise hard-to-calculate losses, and cannot be used primarily to coerce performance through financial punishment.
