A contractor is working on a project that includes a contractual liquidated damages provision. The liquidated damages provision says the contractor is liable for $2,000 per day in liquidated damages if the contractor does not achieve substantial completion by January 1, 2016, a date extended through agreed-upon change orders. Substantial completion has not been achieved by this date and is not projected to be achieved until May 1, 2016. The owner already notified the contractor that it plans to assess liquidated damages and such assessment will be deducted from the contractor’s payment (retainage payment application).
When it comes to liquidated damages, who has the burden of proof: the owner or the contractor?
The owner’s burden is actually quite simple. It is merely a burden of persuasion. All the owner has to do is establish that the project was not substantially completed in accordance with the contract and any approved extensions of time. Typically, an easy burden of persuasion.
This shifts the burden of proof to the contractor challenging the assessment of liquidated damages to establish that the owner was the cause of delays to the substantial completion date (or other contractual date triggering the enforcement of liquidated damages) (e.g., design errors, change orders, change order directives, permit delays, differing site conditions, etc.). See, e.g., PCL Const. Services, Inc. v. U.S., 53 Fed.Cl. 479 (2002) (government has initial burden of persuasion showing contract was not completed on time shifting burden of proof to contractor to establish excusable delays); accord K-Con Bldg. Systems, Inc. v. U.S., 97 Fed.Cl. 41 (2011) (contractor failed to establish owner caused delays precluding the owner from assessing liquidated damages); Carrothers Const. Co. v. City of S. Hutchinson, 755, 207 P.3d 231, 241 (Kan. 2009) (“By placing the burden of proof on the party challenging a liquidated damages clause, we promote a public policy favoring settlement and avoidance of litigation, and allowing parties to make, and live by, their own contracts.”); TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085, 1092 (Mass. 2006) (“The burden of proof regarding the enforceability of a liquidated damages clause, therefore, should rest squarely on the party seeking to set it aside.”).
When you sign a construction contract with a liquidated damages provision, understand the application of this provision if the project is not completed in accordance with the provision. Make sure to ask for and document extensions of time and excusable delays. In other words, preserve your rights under any notice provisions in the contract asking for extensions of time or notifying the owner of scheduling impacts. Also, consult with a scheduling consultant, as may be necessary, to analyze the critical path of the schedule to isolate excusable delay and any concurrent delay establishing that although the project was late there were events or issues that would reduce or fully negate the number of days the owner is assessing liquidated damages for.
Please contact David Adelstein at firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.