Space Master International, Inc. v. City of Worcester
1991 U.S. App. LEXIS 17175, 940 F.2d 16, 1991 WL 140850 (1991)
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Rule of Law:
A liquidated damages clause is unenforceable as a penalty if evidence indicates its primary purpose was to coerce timely performance rather than to serve as a reasonable forecast of just compensation for damages that are difficult to ascertain.
Facts:
- The City of Worcester hired Space Master International, Inc. ('Space Master') to construct and install twenty-three modular classroom buildings at nine school sites to alleviate overcrowding.
- The contract price was $1,514,559, with a required completion time of 120 days.
- The contract contained a liquidated damages provision assessing $250 per day plus $100 per day per site for performance exceeding 120 days.
- Space Master completed the project over 200 days late.
- As a result of the delay, children in Worcester's public schools had to attend classes in hallways, gymnasiums, and libraries, compromising educational programs.
- Citing the liquidated damages clause, the City of Worcester withheld $254,400 from the payment due to Space Master.
Procedural Posture:
- Space Master sued the City of Worcester in the U.S. District Court of Massachusetts, seeking the funds withheld as liquidated damages.
- The City moved for partial summary judgment, asking the court to rule that the liquidated damages provision was enforceable.
- Space Master filed a cross-motion for summary judgment, asking the court to rule that the clause was an unenforceable penalty.
- The district court granted Space Master's motion for summary judgment and denied the City's motion.
- The City of Worcester, as appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the First Circuit.
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Issue:
Is a liquidated damages clause in a public construction contract an unenforceable penalty when the damages are difficult to quantify, but evidence creates a genuine issue of material fact as to whether the clause was intended to compensate for loss or to coerce performance?
Opinions:
Majority - Bownes, Senior Circuit Judge
No, a liquidated damages clause cannot be deemed an unenforceable penalty on summary judgment where a genuine issue of material fact exists regarding the parties' intent. A liquidated damages clause is enforceable if it is a reasonable estimate of anticipated or actual losses that are difficult to prove. While the damages suffered by the City—such as disruption to public education—are difficult to quantify, which typically supports enforcing such clauses, there was conflicting evidence about the City's purpose for the clause. An affidavit from the Superintendent suggested the clause was meant to compensate for various potential losses, but his deposition testimony, along with that of the City's purchasing agent, indicated the clause was intended as a 'penalty' to 'motivate' the contractor and 'encourage' timely performance. This contradictory evidence on the intent behind the clause created a genuine issue of material fact, making summary judgment for either party improper and requiring a trial to resolve the factual dispute.
Analysis:
This decision underscores that the enforceability of a liquidated damages clause hinges not only on the difficulty of calculating actual damages but critically on the intent behind the provision. It establishes that even in public contracts where damages like public inconvenience are inherently unmeasurable, a clause may still be deemed a penalty if evidence suggests a coercive, rather than compensatory, purpose. The case serves as a key precedent illustrating that conflicting testimony regarding intent can create a genuine issue of material fact sufficient to defeat a motion for summary judgment, thereby requiring the issue to be decided at trial.
