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).

WHAT IS SUBSTANTIAL COMPLETION?

Posted on November 8, 2013November 8, 2024 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.