Supplier Delays and the liquidated damages - why force majeure claues should never be overlooked

From my state....and I do not know why the contractor thought a supplier's delay would be an act of God.....maybe it is somewhere else but not Kansas!

Force Majeure Clause Does Not Cover Supplier Delays

Liquidated Damages Provision Enforced
Hutton Contracting Company, Inc. v. City of Coffeyville, 487 F.3d 772 (C.A. 10, Apr. 30, 2007)

Hutton Contracting Company, Inc. (“Hutton”) contracted to construct a power line and a fiber-optic line for the City of Coffeyville, Kansas (“the City”).  Upon completion of the project, the City refused to pay the final $110,159.47, claiming that it was entitled to offsets against most of that amount for contractual liquidated damages because of Hutton’s delays.  Hutton sued to obtain the unpaid amount of the contract price.

The contract provided that the construction must be completed within 45 days of the commencement date, and also that time was of the essence. The contract further provided that the commencement date would be determined by agreement of the parties, but must be no later than May 1, 2000.  The contract provided exceptions for the completion deadline in cases of bad weather or exceptional circumstances (the force-majeure clause).

The force-majeure clause stated that the time for completion would be extended for the period of any reasonable delay due exclusively to causes beyond the control and without the fault of Hutton. The contract also provided that the amount owed to Hutton would be reduced by $500 in liquidated damages for each day of unexcused delay.

Hutton completed the project much later than the due date, because of delays in the delivery of supplies, and the delivery of some defective supplies. Hutton submitted requests for extensions because of the late supply deliveries and because of weather conditions. The extensions were not granted, and the City notified Hutton that it would retain the balance due of $110,159.47 for delays. Hutton suit, claimed that it had performed all of this duties under the contract and was entitled to the full contract price.

The District Court held that the contract’s force-majeure clause did not excuse the delays caused by the problems with the delivery of supplies, because the supplier’s tardiness did not qualify as extraordinary or beyond the control or fault of the Hutton, as the contract contemplated. The supplier was Hutton’s subcontractor, and Hutton’s responsibility.  The District Court also held that the liquidated damages provision was enforceable.  The District Court upheld a setoff for liquidated damages for 171 days, or $85,500, and thus awarded Hutton $110,159.47 minus that amount.

On appeal, the Tenth Circuit agreed that Hutton was responsible to the City for its supplier’s delays, when those delays were not themselves excused by a force majeure, and that the force majeure clause did not of itself relieve Hutton of responsibility for delays caused by its supplier under the contract.

The Tenth Circuit also agreed that the liquidated damages clause was reasonable. The Court noted that the City suffered $76,000 in lost revenue, close enough to $85,000. The District Court judgment was affirmed.

Liquidated Damages

Ramsey Karzem of the Smith, Currie firm in Atlanta recently reviewed the decision from the Armed Services Board of Contract Appeals in the matter of Pete Vicari General Contractor, Inc.

Mr. Kareem indicated the case stands for the proposition that liquidated damages provisions in a phased contract must be negotiated up front. In a phased contract, this must be done pre-bid...even though the assessment may not be for the first, second, third phases of work.

While I agree with his assessment, how often does this happen in the real world? Have any contractors had any dealings with this type of situation?

Liquidated damages

Holloway Consulting Group put together a nice outline of Liquidated Damages over for your review:

"LIQUIDATED DAMAGES

Liquidated damages provisions are often specified in construction contracts as a daily amount to be withheld from the contract price for each day of delay to the contract completion date. However, the primary objective for specifying liquidated damages is often to secure the timely performance promised by the contractor, rather than to recover the specified sum. Because liquidated damages provisions are commonly upheld by the courts, the party breaching the contract completion time requirements may have an uphill battle to refute damages without a persuasive argument about the cause of the delay.

From a historical perspective, penalty bonds were originally used as a security device for failure to perform. However, a breach of performance would often carry consequences far in excess of the damages incurred. Equity courts intervened to prevent unconscionable consequences and the law courts soon followed. The modern view is that if the amount specified for liquidated damages is being used in terrorem to secure performance rather than as a reasonable quantifying measure of convenience or is disproportionate to the value of the performance promised and consideration paid, the liquidated damages provision will be viewed as a penalty and held unenforceable. Otherwise, the contract provision is often enforced if the court finds the following:

1. The amount specified is a genuine pre-estimate by the parties of the extent of the damages that will be caused by a breach of the contract completion time requirements, and

2. The actual damages are incapable or very difficult to accurately be determined.

If the court determines that the specified amount of liquidated damages is a penalty, the contractor or subcontractor is still subject to actual damages. An owner, or a general contractor seeking damages against a subcontractor, should be prepared not only to show how the specified liquidated damages amount was calculated but also be prepared to show through its cost records the extent of the actual damages. If the actual damages are negligible, courts have ruled that liquidated damages would be unreasonable.

The party specifying liquidated damages should do so with care. If the specified amount is too high, qualified contractors may be scared away from bidding. Another consequence is that an unreasonable amount may cause contractors to include a high contingency figure in their bids to cover the possibility of delay damages. In such a case, the owner bears these extra costs whether or not the project is delayed.

Liquidated damages may be estimated as a daily rate for the period of late performance based on one or more of the following:

1. Extra maintenance, operational or utility costs in continued use of an old or inefficient building or facility.

2. Maintenance of a new building or facility before its beneficial use.

3. Extra rental of other buildings because or late completion or the new building.

4. Interest on investment or borrowed capital of the project.

5. Costs for extra personnel who are on standby waiting for completion.

6. Extended supervision, inspection or engineering costs.

7. Loss of revenue, bridge tolls, sale of product, rental value of property, etc.

8. Moving costs.

9. Impact costs.

10. Wage/material cost increases.

Inclusion of a liquidated damages clause in a contract is generally deemed to be in lieu of actual damages for delay. If there is no liquidated damages clause, however, the contractor may be liable for and the owner may withhold actual damages.

The owner is usually not entitled to collect both liquidated damages and actual damages except where liquidated damages are limited to certain specified types of owner damages, such as extended engineering, interest, taxes, etc., and where other damages which may occur are specifically excluded in the liquidated damages calculation, such as claims of other contractors affected by the delay. Likewise, the owner should not circumvent the liquidated damages clause because its actual damages are greater unless the liquidated damages are qualified by such exclusions.

In case of a delay caused by a subcontractor, the prime contractor may not only have to pay the owner liquidated damages for delay but also pay additional costs for its own damages, such as extended overhead and field indirect costs and delay claims of other subcontractors affected by the delay. Because these liquidated damages and other damages are separate and distinct, the prime/subcontractor agreement should be clear as to the prime contractor's entitlement to collect both types of damages.

The date of commencement of liquidated damages is usually the contract completion date, as adjusted by any appropriate time extensions for compensable and excusable delays. Liquidated damages are recognized by the courts to stop when substantial completion is achieved or the date the owner takes beneficial occupancy. To avoid uncertainty, the liquidated damages clause should specify if weekends and holidays are to be included in the delay calculation. In the case of abandonment by the contractor, the courts have held that it is not reasonable for the daily sum to be paid forever, but commensurate with the period or amount of actual injury.

Liquidated damages should not be enforced without taking into account a reasonable time for the contractor to complete increased work or without considering excusable delays. Letters or oral directives by the owner or its agents threatening liquidated damages or demands that the contractor meet the contract completion date despite excusable delays can be interpreted as directed or constructive acceleration. Excusable delays may include formal change orders, constructive changes, labor disputes, unusual delay in transportation of equipment or materials, unanticipated adverse weather conditions, unavoidable casualties or any causes beyond the contractor's control.

If the owner interferes with the contractor's performance, or the general contractor interferes with its subcontractor, the owner or general contractor may have lost its only right to assert liquidated damages. In addition, if the owner caused any delays, the owner may not be entitled to withhold liquidated damages even if its contractor failed to request a time extension within the specified time limit in the contract.

In a complicated project, there may be overlapping or concurrent delays which may be attributable to both the owner and the contractor. Such concurrent delays should be sorted out before the owner can be certain liquidated damages are due.

The owner must be able to demonstrate that the delays were not excusable. Also, the owner must demonstrate that there were not concurrent excusable delays and nonexcusable delay or apportion the concurrent excusable delays from the nonexcusable delays. If the owner is unable to distinguish and apportion concurrent nonexcusable delays from excusable delays, the owner may not be entitled to either liquidated damages or actual damages.

Some courts have held that delay damages will not be apportioned to each party and, if the owner causes some delay, no liquidated damages can be recovered. More often, however, the courts will accept apportionment. To avoid such uncertainty, the liquidated damages clause should specifically provide for apportionment and that the contractor will not be assessed damages for excusable delays.

Contractors should be aware that the owner's issuance of a change order after the original completion date will not serve to waive liquidated damages for contractor-caused delays prior to the date of the change order. Change orders can, however, cause problems to owners with respect to liquidated damages. If the owner includes a reservation of rights for liquidated damages in one change order but fails to do so in subsequent change orders, this inconsistency may indicate a waiver of liquidated damages. A prudent owner should reserve its rights for liquidated damages in all change orders, especially if the change orders are dated after the contract completion date.

Liquidated damages may be waived by the owner if no claim for such damages is made prior to final payment. Liquidated damages may also be waived if:

1. the owner failed to put the contractor on notice that it intended to enforce the liquidated damages provision after a delay has occurred,

2. if the owner allowed the contractor to complete the work after the scheduled completion date had passed, or

3. if the owner continued to make progress payments without a deduction for liquidated damages."

This article brings to mind the cases I have been involved with .... and usually there is some fault on both sides so a clear award of liquidated damages is hard to determine, requiring a significant amount of attorney time to concoct a settlement.

As anyone out there been able to clearly establish liquidated damages without some type of claim of the non-demanding party that fault lies with both parties, therefor liquidated damages are not awardable?

Economic Loss Rule

It would appear for Colorado homeowners that the economic loss action against a subcontractor can be overcome by the Construction Defect Action Reform Act (CDARA) as enacted in 2001.  Yet a decision from last year prevented a subcontractor from suing a project engineer.....two different questions, but with the new legislation, will both lawsuits now pass a motion to dismiss?

Economic Damages in Wisc.

In yet another economic damages case, the Wisc. Supreme Court ruled economic loss rule precludes an owner from suing a subcontractor. Linden v. Cascade Stone Co., Inc., 699 N.W. 2d 189 (2005). The court essentially indicated that the economic rule applies to products, not services...and that the "predominant purpose" ("totality of the circumstances") test applies to determine whether or not a service or product sale is taking place. Here, the court ruled a home is a product. Under the "integrated system" test, it would not apply to subcontractor's defective workmanship. So...no sue against the subcontractor, but there was a suggestion of a suit under a theory of third party beneficiary if the general is insolvent.

Economic Loss

Keeping on the theme of economic loss (see my comments from yesterday), a court in California denied the claim of economic loss to a contractor from the actions, or in-actions of the project architect. See Greg Opinski Construction, Inc. v. Pacific Design Assoc., Inc.This is one of those issues where the answer will be determine by where you are doing business.....more likely on the east coast than the Midwest or California?

Economic Loss Doctrine

While I discussed the issue of economic damages in Kansas in recent posts, I see that in a recent New York case a claim for economic loss against an architect was allowed, even where the architect did not have a direct contract with the contractor. However, note that the claim was asserted by the surety, not the contractor. Query: Can a surety assert such a claim? I wonder.......while the court found other cases that would not allow the assertion of such claim by the contractor because of lack of privity, here the relationship "approached" that of privity....thus the ruling.....ooooo, how does one contract around this situation?

Liquidated damages

In a recent article in  The Construction Executive (September, 2005), Chris Sullivan of Interface Consulting International, Inc., discussed the use of liquidated damages and argues that "...[a] more equitable position could be for the parties to agree in the contract language that [liquidated damages] for delay should be assessed only if the prime reason a project is delayed is due to the acts or omissions of the contract." He further suggests contract language as follows: "Notwithstanding any thing to the contrary elsewhere in the contract or in law, the owner and contractor agree that no liquidated damages for delay shall become due and payable by contractor to owner unless the owner could have completed the facility and started receiving beneficial use of said facility but for contractor's delay". [A "no harm-no foul" philosophy].

Sorry, but to me liquidated damages should only come into play where damages are not determinable...his thoughts seem to be a substitute for finding fault or liability....

Measure of Damages

As a recent Missouri case tells us, the damages for construction defects is the cost of repair or the dimunition in value........why? Well, the court is trying to put the aggrieved party in as good a position as if the contract had been performed. The general rule is the difference between the fair market value of the material before and after it is installed. One exception....when the property can be restored to is former condition at a cost of les than the diminution in value.....so if one pays a flooring company $2,468 to install a floor, but to no avail, and pays another contractor $1,311 to put in the correct floor, does the plaintiff get to recover $3,779 ($2,468 plus $1,311)? The Missouri Court of Appeal said NO...the correct measure of damages was $1,311 because the defendant restored the improperly installed floor, apparently back to its original condition.....so the defendant only need paid for the new floor at $1,311...Get it? (And this went to the Court of Appeals....bet the attorney fees cost a bit more than the judgment awarded to the plaintiff?). Farning v. Brendal (Mo. App., 2004)

Economic Loss Rule

I have run across a recent rash of economic loss cases.....cases where a plaintiff is limited only to contract or damages (or warranty damages), not negligence or strict liability. Why is this relevant to contractors....apparently attorneys are telling their clients they can obtain something other the typical breach of contract damages....but  frankly, these type of rulings should keep the scope and amount of insurance coverage down as "wilded eyed" plaintiffs can not obtain unlimited damages....a benefit to contractors?