CHALLENGING ENFORCEABILITY OF LIQUIDATED DAMAGES (IN FEDERAL CONSTRUCTION CONTEXT)

Posted on March 3, 2024March 3, 2024 by David Adelstein

A recent summary judgment opinion from the Armed Services Board of Contract Appeals (ASBCA), Appeals Of – BCI Construction USA, Inc.,ASBCA No. 6257, 2024 WL 773324 (2024), contains a worthy discussion regarding a contractor’s challenge to the government’s assessment of liquidated damages, specifically the enforceability of the liquidated damages rate. Although this challenge is in the federal context, this discussion would be more expansive and apply outside of the federal context.

When dealing with the enforceability of a liquidated damages, the ASBCA “examines whether the liquidated damages amount ‘is extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention or oppression.” Appeals of – BCI Construction USA, Inc. (citation omitted).

First, the government argued that the contractor waived the right to challenge enforceability of the liquidated damages provision. The government argued this should have been raised in a pre-bid, bid protest regarding the terms of the solicitation. The ASBCA shot this down holding the contractor did NOT waive the right to challenge the liquidated damages rate by not challenging it before its bid as “there was no ‘patent error” of which [the contractor] was aware at the time it submitted its bid. Indeed, there is no allegation that [the contractor] had any knowledge of what it believed might be in error regarding the liquidated damages amount set forth in the IFB [Invitation For Bid].” Appeals of – BCI Construction USA, Inc.

Second, as to the reasonableness of the liquidated damages rate, “‘liquidated damages clauses are perfectly allowable so long as they do not appear to have been designed as a punishment for late performance but, instead, reflect an attempt to place a value on late performance in circumstances where ascertaining that value would be otherwise difficult, if not impossible.’” Appeals of – BCI Construction USA, Inc. (citation omitted).

The contractor bore the burden to challenge the liquidated damages rate was unenforceable. The ASBCA noted this burden “‘is an exacting one, because when damages are uncertain or hard to measure, it naturally follows that it is difficult to conclude that a particular liquidated damages amount or rate is an unreasonable projection of what those damages might be.’” Appeals of – BCI Construction USA, Inc. (citation omitted).

The contractor claimed the liquidated damages rate was not reasonably related to the government’s anticipated damages if the contractor completed the project late. The ASBCA found the daily liquidated damages rate was .001 percent of the contract price and “[t]here is nothing inherently unreasonable about a per day reduction that equates to 1/100 of one percent of the contract price.” Appeals of – BCI Construction USA, Inc.

Moreover, the ASBCA explained, “regardless of how the liquidated damages figure is derived, the clause will be enforced if the amount is reasonable for the particular agreement at the time it was made. This especially is true because, as noted by the Court of Claims, ‘[t]he Government’s damages stemming from delayed receipt of the supplies or construction it ordered are normally hard to measure.” Appeals of – BCI Construction USA, Inc. (citation omitted). Therefore, the ASBCA found the contractor did not carry its burden to support the liquidated damages rate served as an unreasonable projection.

Third, the contractor argued that the government was assessing liquidated damages beyond the date of substantial completion, which was improper. The contractor argued the project was substantially completed on April 23, 2021, which was when the project was capable of serving its intended purpose. The government opposed this because there were numerous (at least 104) items yet to be completed. The ASBCA held there was a question of fact as to when substantial completion occurred: “‘Whether a contract has been substantially completed is a question of fact and a project is considered substantially completed when it is capable of being used for its intended purpose.” Appeals of – BCI Construction USA, Inc. (citation omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE WORD “ESTIMATE” IN A CONTRACT MATTERS AS TO A COMPLETION DATE

Posted on January 20, 2024January 20, 2024 by David Adelstein

Language in a contract matters. The word “estimates” or “estimated” matters particularly when it comes to a date certain such as a substantial completion or completion date. Remember this.

Here is an example.

In Parque Towers Developers, LLC v. Pilac Management, Ltd., 49 Fla.L.Weekly D190a (Fla. 3d DCA 2024), a trial court held that the developer did not complete the construction of five condominium units by the date in the purchase agreements. The developer appealed because “[t]he agreements contain no date certain for the completion of the units, but rather include a clause that ‘Seller estimates it will substantially complete construction of the Unit, in the manner specified in this Agreement, by December 31, 2017, subject to extensions resulting from ‘Force Majeure (the ‘Outside Date’).’” Parque Towers, supra. Another provision in the purchase agreements stated, “[w]henver this Agreement requires Seller to complete or substantially complete any item of construction, that item will be understood to be complete or substantially complete when so completed or substantially completed in Seller’s opinion. Id.

The units were completed with closing taking place in early 2019 – LONG after the December 31, 2017 date. The purchasers sued the developer claiming the developer breached the contract, which the trial court agreed with in a non-jury trial. On appeal, the appellate court reversed…because language in a contract matters:

Here, the agreements did not require [the developer] to complete the units by December 31, 2017, or otherwise make time of the essence as to the seller’s obligations. The only completion date referenced in the agreements is specifically described as an “estimate” for when the units will be “substantially complete” according to [the developer’s] own opinion, and [the developer] ultimately did finish the units and schedule the closings within the time required by the agreements and upon proper notice. … Moreover, while the Purchasers all eventually notified [the developer] that they considered its failure to deliver the units by December 31, 2017, to be a default under the agreement, none of them claimed default or sought to enforce the agreements until April 2018 at the earliest, long after the original estimated date and after they had been informed that the estimated completion date had been changed. Thus, irrespective of the evidence supporting [the developer’s] claims of delays due to force majeure, the trial court could not find [the developer] in breach of a completion date that was purely estimated.

Parque Towers, supra (citations omitted).

“TIME IS MONEY!” IN CONSTRUCTION AND THIS IS WHY THERE IS A LIQUIDATED DAMAGES PROVISION

Posted on January 15, 2022January 16, 2022 by Edward Garber

In construction, the adage “Time is Money!” rings true for all parties involved on a project. This includes an owner of a project that wants a project completed on time, i.e., by a substantial completion date. While substantial completion is often defined as when an owner can use a project for its intended purpose, this intended purpose typically equates to beneficial occupancy (in new construction) and other factors as identified in the contract.

The best mechanism for an owner to reinforce time and the substantial completion date is through a liquidated damages provision (also known as an LD provision) that includes a daily monetary rate for each day of delay to the substantial completion date.

A liquidated damages provision is not designed, and should NEVER be designed, to serve as a penalty because then it would be unenforceable. Instead, it should be designed to reasonably compensate an owner for delay to the substantial completion date that cannot be ascertained with any reasonable degree of certainty at the time the contract is being negotiated and executed. (Liquidated damages are MUCH easier to prove than actual damages an owner may incur down the road.) As an owner, you don’t really want to assess liquidated damages because that means the project is not substantially completed on time. And, in reality, a timely completed and performing project should always be better and more profitable than a late and underperforming project. However, without the liquidated damages provision, there isn’t a great way to hold a contractor’s feet to the fire with respect to the substantial completion date.

There are numerous ways to equitably craft a liquidated damages provision if it is a negotiated provision (like in private projects). It can be based on project phases or milestones. It can be based on one substantial completion date. It can include a grace period. It can include gradual increases in the daily rate based on certain time periods associated with delay. It can be capped at a certain amount to cap the exposure. The bottom line is that it is a risk that gets factored into the contract and substantial completion date to emphasize timely completion.

Many construction contracts will contain a mutual waiver of consequential damages provision. This provision may include specific examples of consequential damages. In other words, regardless of whether such examples truly constitute consequential damages, these damages examples are contractually mutually waived by the parties. Two examples commonly include loss of use damages and increased or additional financing damages. These two examples are categories that do go hand-in-hand with an untimely project. For instance, if a project is late, the owner cannot use the project by the substantial completion date and will have increased and/or additional financing costs. Without a liquidated damages provision, and with a mutual waiver of consequential damages provision, an owner may be sh*t out of luck with recovering delay damages for a delayed project because primary actual delay damages they could prove have been waived. (Thus, there is nothing holding the contractor’s feet to the fire regarding the substantial completion date.) Hence, if you are going to negotiate having no liquidated damages provision, be mindful of the mutual waiver of consequential damages provision and what you may be conceding.

This is important: simply because there is a liquidated damages provision does not mean a contractor should unilaterally be exposed to liquidated damages for a delayed project. There may be legitimate excusable delay that needs to get factored in including excusable compensable delay meaning the contractor is owed its own delay damages. There could be concurrent delay that needs to get factored in. While an owner may not accept a contractor’s request for additional time or claimed excusable or concurrent delay, this does not mean a contractor is just going to cave when it comes to an owner’s assessment and withholding of sums associated with liquidated damages. Most contractors are not going to unless it is irrefutable that the delay to substantial completion was caused by them (more specifically, a trade).

A contractor agreeing to a liquidated damages provision needs to make sure that it flows the risk downstream to trades that may cause the delay. A contractor still needs to prove the trade caused the delay, but the contractor must flow-down that risk. If a trade is unwilling to assume that risk, that needs to be considered by the contractor. In any event, the contractor cannot agree that the trade is not liable for any delay because the risk the contractor has assumed is not transferred to a trade that may cause that risk meaning there is nothing that holds that trade’s feet to the fire.

A liquidated damages provision is neither uncommon nor unreasonable. It is a risk, oftentimes negotiated on private jobs but maybe not the case on public jobs, that is factored in at the onset of any project. It is a risk that cannot be overlooked but is the risk designed to best maximize the emphasis on time is of the essence as to the substantial completion date.

HOW DOES YOUR CONSTRUCTION CONTRACT TREAT FLOAT

Posted on November 5, 2017November 5, 2017 by Edward Garber

Although there are different types of construction schedule float and more technical definitions, the definition that makes sense to me is that float is the amount of time a particular activity can be delayed without that activity delaying the project’s completion date (substantial completion date). In looking at a construction schedule, this determination is made from looking at the difference between the early start date for an activity and the late start date for that activity or the difference between the early finish date for that activity and the late finish date for that activity in your CPM schedule (which should be the same amount of time). This is often referred to as “total float” and is the float that I usually focus on since it may pertain to a delay to the substantial completion date of the project and can trigger either the assessment of liquidated damages and/or the contractor’s extended general conditions, whatever the case may be.

Consider this hypothetical discussed in Weaver-Bailey Contractors, Inc. v. U.S., 19 Cl. Ct. 474, 481 (1990) that discusses the concept of total float by using a simple example that may apply to a residential house job:

To reiterate, a critical path activity is one which, if allowed to grow in duration at all, will cause the overall time required to complete the project to increase. By contrast, an activity with float time may grow in duration up to a certain point, without an adverse impact on the time required to complete the project. Consider the example of a contractor who committed himself to building a house, beginning on January 1, 1989. The contractor has determined that he will need one year to complete the job. Pouring the foundation is a critical path activity because any increase in the amount of time required to complete the foundation will cause an increase in the amount of time needed to complete the house; work on the walls, floors, roof, and utilities cannot begin until the foundation is complete.

***

Suppose that as part of the job, the contractor promised to build a fence along two edges of the property, and that building the fence will take 20 days. No other work depends on the completion of the fence, so delaying work on the fence until December 11, 1989 will not put the contractor in danger of late completion. In other words, building the fence is an activity with a lot of float time. However, float time is never unlimited. If on December 20 the contractor has yet to begin the fence, or if there is more than 11 days’ worth of fencing work to be done as of December 20, then the contractor will not finish the job on time. From the foregoing, one can make the following generalization: regardless of whether an activity is on the critical path of a project, if the time required to complete the activity is greater than the time remaining to complete the project, then project completion will be delayed.

***

Consider now the effect on our hypothetical contractor if on December 1, before fencing work had begun, the buyer of the house told the contractor that he would like all four sides of the property to be fenced, thereby doubling the fencing work. Clearly the contractor could not complete the entire project by the end of the year, but through no fault of his own. The time required for the fencing portion of the job is now 40 days, and the contractor has only 31 days left.

Many contracts, particularly in the public sector, contain a float-sharing provision that basically says that total float is for the benefit of the project and not for the exclusive benefit of either the owner or the contractor. There are different ways this can be worded. Under this float-sharing provision, construction is taken as it occurs such that use of float is typically applied on a first-come first-serve basis provided parties acted in good faith through the use of the float (good faith, obviously, being a relative term). This obviously can work for or against a party based on when a delay occurs during construction.

There are contracts that include language that provide that float is for the exclusive use and benefit of the owner. Under such a clause, float is not for the benefit of the contractor to account for contractor-caused delays; rather, it is for the sole use of the owner to apply to delays it may cause. When I am representing the contractor, I warn them of the risk of this language as it takes away from the anticipated uncertainty that exists in construction, which is why schedules are never written in stone. Further, if an owner can consume all of the float, it shifts, in my opinion, quite a bit of risk to the contractor since the owner can breach certain time commitments or obligations in the contract under the premise that it was consuming available float. When I am representing the owner, I generally do not include such a provision as I tend to subscribe more to the presumed equity of a float-sharing provision, as such a provision can certainly benefit an owner with delays that occur early on in the job.

There is also the sentiment that float-sharing provisions, no different than provisions that give the owner exclusive use of float, are equally unfair. There is an air of truth to this sentiment because a contractor generates the schedule and controls the means and methods of construction. In doing so, the contractor, through experience, tries to conservatively, but flexibly, account for certain delays it can reasonably anticipate that perhaps would be consumed by float in the schedule. The contractor cannot reasonably account for owner-caused delays and, in reality, an owner would not want the contractor to do so because there would be a huge time contingency built into the schedule to account for such unknown delays (e.g., is the permit going to be issued on time, is the designer going to promptly respond to RFIs and submittals, is there going to be change orders, is there going to be a design issue, etc). The owner would never agree to this because it would simply delay the completion date.

How does your construction contract treat float? How does it define float? How does the consumption of float potentially impact your project based on how you scheduled activities through completion of the project?

BURDEN OF PROOF CHALLENGING ASSESSMENT OF LIQUIDATED DAMAGES

Posted on January 23, 2016January 23, 2016 by Edward Garber

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.

WHAT IS SUBSTANTIAL COMPLETION?

Posted on November 8, 2013November 8, 2013 by Edward Garber

The term “substantial completion” is in most construction contracts. And, it should be. This date marks the date the owner expects to be able to use its project for its intended purpose and, if it cannot, the contractor will (likely) be assessed liquidated damages for the delay to the substantial completion date. The owner’s contractual ability to assess liquidated damages serves to motivate the contractor to substantially complete the project by the agreed date and to reimburse the owner for delay-related damages that cannot be ascertained with a reasonable degree of certainty at the time of the contract.

A. How is Substantial Completion Defined

Under the general conditions of the AIA (American Institute of Architects A201 Document 2007), substantial completion is the “stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.” (AIA Document A201 s. 9.8.1) Under the AIA, the architect is required to conduct inspections to determine the date of substantial completion and certifies this date.

The general conditions of the EJCDC (Engineers Joint Contract Documents Committee C-700 Document 2007) defines substantial completion similarly as:

“The time and date at which the Work has progressed to the point where, in the opinion of Engineer, the Work is sufficiently complete, in accordance with the Contract Documents, so that the Work can be occupied and/or utilized for the purposes for which it is intended….Substantial Completion cannot occur before the Project is issued a Certificate of Occupancy (or Completion, if applicable) by the governing building department that allows Owner to utilize the entire Project for the purposes for which it is intended.” (EJCDC Document C-700 s. 1.01.46)
Whether it is an AIA, EJCDC, or other industry form document, substantial completion is routinely defined as that point in time when the owner can utilize its project for the purposes for which it is intended.

A leading case in Florida discussing substantial completion is J.M. Beeson Co. v. Sartori, 553 So.2d 180 (Fla. 4th DCA 1989). This case involved an owner assessing liquidated damages against its contractor. The contractor was hired to construct a shopping center that required substantial completion within 300 days of commencement. The contract provided that substantial completion occurred when “construction is sufficiently complete in accordance with the Contract Documents, so the owner can occupy or utilize the work or designation portion thereof for the use for which it is intended.” J.M Beeson, 553 So.2d at 181. Although two anchor tenants in the shopping center received Certificates of Occupancy within the 300 days, another tenant did not. The owner took the position that substantial completion had not been achieved, irrespective of the Certificates of Occupancy, because items such as landscaping were not completed. The Fourth District dismissed the owner’s position finding:

“[W]hen the owner can put tenants in possession for fixturing and can begin to collect rents, the owner begins to utilize the work for its intended purpose. When the owner was able to occupy and fixture the constructed space, the construction was substantially completed.” J.M. Beeson, 553 at 182-83 (internal citations omitted).

The Fourth District indicated that the substantial completion date occurred no later than the date the shopping center was able to obtain certificates of occupancy for the tenants. Notably, if the contractor in J.M. Beeson was simply required to build shell retail space where the tenants were responsible for their own tenant improvements, the substantial completion would likely occur when an applicable certificate of completion was issued for the shell space pursuant to the shell permit that would entitle the tenants to begin their individual improvements. See, e.g., Hausman v. Bayrock Investment Co., 530 So.2d 938 (Fla. 5th DCA 1988) (finding that test for substantial completion for property tax purposes is the date property is put to use for which it is intended; in this case, since contactor was building shell retail space, substantial completion occurred when shells were completed).

If an owner is in a position to use its project for its intended purpose (whether for personal use, public use, whatever the project entails), this really should mark the substantial completion date. This is more of an objective date determined by the governing building department through the issuance of a certificate relating to the permit.

B. Contract Drafting / Understanding Tips

I prefer the substantial completion definition in the general conditions of the EJCDC (above) because it references that this point in time should not be earlier than the issuance of a Certificate of Occupancy (or applicable Certificate of Completion). Even though most contracts give certain discretion to the design professional to determine and certify the date, the fact remains that the Certificate of Occupancy is realistically the date that determines when an Owner can use its project for its intended purpose since it permits occupancy. I often like to tie the substantial completion date in the contract to the Certificate of Occupancy date or Temporary Certificate of Occupancy date (since the TCO date may be the date that allows occupancy under certain conditions) since this more accurately reflects the date the Owner can use its project for its purpose (or, if it is a project for shell space, the Certificate of Completion date that authorizes the tenant to construct finishes / improvements). Also, this removes some of the discretion from the design professional and shifts their focus to generating the punchlist and working towards final completion.

From an owner’s perspective, if it agrees to a mutual waiver of consequential damages in the contract, it must absolutely include a liquidated damages provision tied to the substantial completion date. If it does not want to include a liquidated damages provision, then the owner needs to ensure there is not a mutual waiver of consequential damages provision and, if there is a delay to the substantial completion date, be in a position to prove its actual delay-related damages.

From a contractor’s perspective, it wants to agree to a substantial completion date where arguably there is float built into its schedule to ensure it has enough time to substantially complete the project. Also, it will want to ensure through flow-down provisions in its subcontracts that it has the ability to flow down assessed liquidated damages to responsible subcontractors that impact its critical path.

From a subcontractors’ perspective, it needs to understand the contractor’s schedule and how the work is sequenced and ideally have input particularly relating to durations for its activities based on the sequencing of the work. Otherwise, the subcontractor could be putting itself in a position where it will be notified of delays since it is unable to meet its required durations.