Liquidated Damages and Phased Contracts

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September 15, 2006


Introduction

Liquidated damage provisions are very common in construction contracts. Typically, these provisions express an agreement between the owner and contractor fixing a sum of money, which the contractor will pay the owner as damages for each day of delay in contract completion. These provisions are included due to the inherent difficulty in determining an owner’s actual damages for delayed completion of a construction project. In theory, as with all provisions in a contract, the liquidated damages provision and the calculated per diem rate of delay damage are negotiated terms. In reality, however, there is very little negotiation or agreement regarding this contractual provision and, generally, the owner will estimate an amount to cover any additional costs related to a delay in completion and insert it in the contract with little contractor participation. Liquidated damage provisions are regularly enforced, and most jurisdictions now presume these clauses to be valid. As noted by one court:

The modern trend is to look with candor, if not with favor, upon a contract provision for liquidated damages when entered into deliberately between parties who have equality of opportunity for understanding and insisting upon their rights, since an amicable adjustment in advance of difficult issues saves the time of courts, juries, parties, and witnesses and reduces the delay, uncertainty, and expense of litigation.

 

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Gorco Constr. v. Stein, 99 N.W.2d 69 (Minn. 1959). As such, the contractor challenging the enforcement of a liquidated damages provision bears the burden of demonstrating that the clause should not be enforced.

Because a fundamental principle of contract law is that a party should not be put in a better position than it would have been in had the other party properly performed its contractual obligations, a liquidated damages provision will not be enforced if it amounts to a penalty for breach of contract. The stipulated sum must be reasonably proportionate to the probable loss resulting from the delayed completion of the project. See Georgia Income Property Corp. v. Murphy, 354 S.E.2d 859 (GA. Ct. App. 1987). Recently, the Armed Services Board of Contract Appeals (“ASBCA”) evaluated a liquidated damage clause in the context of a phased contract. Pete Vicari General Contractors, Inc., ASBCA No. 54982, 06-1 BCA ¶ 33,136. In affirming the imposition of liquidated damages on earlier phases of a project even though the last phase was completed on schedule, the ASBCA illustrated the importance of carefully reviewing the terms of a liquidated damage provision, assessing the reasonableness of the stipulated sum, and, to the extent there is a disagreement as to the sum, the necessity of challenging it prior to entering into the contract.

Factual Background

 

In May 1998, Pete Vicari General Contractors, Inc. (“Vicari”) was awarded a contract for the construction of two new buildings and renovation of an existing building at a naval air station. Pursuant to the terms of the contract, the work was to be performed in three successive phases: (1) Phase A – Site work; (2) Phase B – Construction of Base Civil Engineering Building; (3) Phase C – Renovation of Building 149. The contract contained specific completion dates for each phase of the project with the final completion date set as not later than 881 days after the notice to proceed. The liquidated damages clause included daily rates for delay in completing each of the phases as follows: (1) Phase A - $200.00; (2) Phase B - $2,113.00 and (3) Phase C - $352.00.

The notice to proceed was issued on June 5, 1998 and Vicari commenced work on the project. Although the contract was modified on at least three occasions to extend the completion dates for each of the three phases, Phases A and B were completed 62 and 33 days late, respectively. Vicari, however, completed Phase C prior to the completion date – 41 days early. When the project was completed, the government paid Vicari the balance due on the contract price less $12,400 for 62 days delay in completion of Phase A and $67,616 for 32 days delay in completion of Phase B. Vicari submitted a claim to the contracting officer demanding “a complete recovery of liquidated damages charged to Vicari for Phase B in the amount of $69,729”, among other things. The contracting officer did not issue a decision and, thus, Vicari’s claim was deemed denied. Vicari appealed the deemed denial to the ASBCA.

Decision on Appeal

 

On appeal to the ASBCA, Vicari moved for summary judgment on that part of its claim demanding release of the liquidated damages withheld for late completion of Phase B. In support of its motion, Vicari argued: (1) liquidated damages can be assessed only for the overall delay in contract completion; and (2) by withholding liquidated damages for the late completion of Phase A (i.e. 62 days), the government had exceeded the total days for which damages were due. The board rejected the contractor’s arguments.

The ASBCA began its analysis by reviewing the language of the contract to determine the applicability of the liquidated damages clause to the dispute. The board determined that the contract specifications clearly mandated that the contract work be performed in three successive phases and specified the time period in which each phase was to be completed. In addition, the ASBCA noted that the liquidated damages clause of the contract specified different rates for each phase and did not set a single rate for the entire contract. These express conditions of the contract coupled with the government’s reservation of rights to assess liquidated damages for the delay in completion of the preceding phase of the contract work, which was included in each modification extending the completion date for each phase, evidenced an agreement between the parties that liquidated damages applied to the interim completion dates for Phases A, B, and C. Accordingly, the board found no merit to Vicari’s contention that the liquidated damages clause applied only to late completion of the entire contract and that no liquidated damages were due for the delayed completion of Phase B.

A secondary argument raised by Vicari was that the daily rate for delay damages with respect to Phase B was not a reasonable estimate of the damages sustained or proportionate to the actual loss resulting from the delay in completing that phase of the project. Specifically, Vicari pointed out that the daily rate of $2,113.00 for Phase B delays was excessive and disproportionate to the rate specified for Phase A, $200.00 per day, given that a day of delay in completion of Phase B would cause no greater delay in completing the new buildings than a delay in completion of Phase A. While the board recognized Vicari’s contention as plausible, it, nonetheless, rejected the argument for want of conclusive evidence in that regard. According to the ASBCA, based on the record, there was no way of determining whether the Phase B rate was unreasonably high or whether the Phase A rate was unreasonably low. Moreover, because the government was able to demonstrate that the daily rates were determined in accordance with Naval Facilities Engineering Command manual, it was presumed reasonable and Vicari had the burden of proof to rebut the presumption. Because Vicari offered no evidence that the Phase B rate was an unreasonable estimate of the resulting damages for delayed completion, Vicari’s appeal was denied.

Comment

The ruling in Pete Vicari General Contrator, Inc., while not altering the legal landscape with respect to the application of liquidated damages clauses, is interesting in that it implicitly held that a contractor challenging the daily rate for liquidated damages must do so pre-bid. That is, the board specifically found that Vicari did not allege, “nor did the record reflect that it protested the specified liquidated delay damages rates as unreasonable when it bid the contract.” In other words, in the absence of evidence to the contrary, it seems the ASBCA viewed the liquidated damages clause as an agreed upon term of the contract to which the contractor was bound. To avoid such unintended consequences, contractors should carefully review any liquidated damages clause in an agreement and assess whether the daily rate is reasonable and proportionate to the damages an owner will likely incur as a result of a delay in completing the project. In addition, to the extent there is disagreement as to the per diem amount, any objections or challenges thereto should be made pre-bid.

Ramsey Kazem

404/582-8065

[email protected]

Member of the State Bar of Georgia


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