SUBCONTRACT SHOULD FLOW DOWN DELAY CAUSED BY SUBCONTRACTORS

Posted on November 21, 2020November 21, 2020 by Edward Garber

A general contractor’s subcontract with its subcontractor should include a provision that entitles it to flow down liquidated damages assessed by the owner stemming from delays caused by the subcontractor. Such a provision does not mean the general contractor does not have to prove delays caused by the subcontractor or can arbitrarily allocate the amount or days it claims the subcontractor is liable. The general contractor still will need to reasonably establish the delays the subcontractor caused the critical path of the schedule, i.e., delayed the job. In addition to the right to flow down liquidated damages, the subcontract should also entitle the general contractor to recover its actual extended general conditions caused by the subcontractor’s delays (regardless of whether the owner assesses liquidated damages). The objective is that if the subcontractor delays the job, the subcontractor is liable for liquidated damages the general contractor is liable to the owner for in addition to the general contractor’s own delay damages. This is an important subcontractual provision so that the risk of delay caused by subcontractors is clearly flowed down to them in the subcontract.

In a 1987 case, Hall Construction Co., Inc. v. Beynon, 507 So.2d 1225 (Fla. 5^th DCA 1987), the subcontract at-issue contained language that stated, “The parties hereto agree that a supplier who delays performance beyond the time agreed upon in this Purchase Order shall have caused [general contractor] liquidated damages in the amount required of [general contractor] by their contract per day for each day such delay continues which sum the supplier hereby agrees to pay.”

The general contractor was liable to the owner for liquidated damages in the amount of $1,000/day and settled the liquidated damages assessment with the owner for the amount of $20,000 (which was a reduction from a $60,000+ exposure for 60+ days of delay). The general contractor looked to apportion the liquidated damages to subcontractors it claimed was liable for the delay. The subcontractor at-issue disputed its apportionment; therefore, the general contractor sought ALL of its delay damages caused by the subcontractor for the full amount of the 60+ day delay period. The appellate court held that while the subcontract could be clearer, it was still unambiguous that the general contractor could ONLY recover liquidated damages because that is all that contract afforded:

Liquidated damages is a fictitious contractual amount which the parties agree will be paid for breach if damages are not readily ascertainable at the time the contract is drawn. Although the [general contractor] maintains that it is entitled to liquidated damages as well as actual damages suffered as a result of the delay, we find that the parol evidence rule precludes such a finding.

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Had the general contractor been aware of the parol evidence rule, a different contract may have been provided. For example, a contract with one paragraph for indemnification of all liquidated, or other, damages paid by the general to the owner and another paragraph for payment of other actual, consequential damages suffered by the general as a result of the delay caused by the sub.

Hall Construction Co., 507 So.2d at 1226-27.

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.

PROVING IMPACTS TO CRITICAL PATH TO DEFEAT LIQUIDATED DAMAGES ASSESSMENT

Posted on September 15, 2019September 15, 2019 by Edward Garber

When a contractor is staring down the barrel of an owner’s assessment of liquidated damages, the burden will fall on the contractor to establish that the delay was attributable to the owner and the owner’s agents. The contractor will want to do this not only to defeat the assessment of liquidated damages, but because it will want to establish that the delay caused it to incur extended field overhead (general conditions) for which the owner is responsible. A contractor supports its burden by proving the impacts to its critical path. “In general, proving an allegation of government-caused delays without a means of showing the critical path is a steep prospect.” James Talcott Construction v. U.S., 2019 WL 1040383, *8 (Fed. Cl. 2019) (unreported opinion) (finding that because contractor did NOT present a critical path analysis it could not support its claim for delay caused by the government).

Avoiding the assessment of liquidated damages means the contractor needs to support that it encountered excusable delay and it is/was entitled to an extension of time to complete the project.

An excusable delay is one due to causes that are unforeseeable, beyond the contractor’s control, and not resulting from its fault or negligence. The delay must be to overall contract completion, meaning ‘it must affect the critical path of performance.’ If the failure is excusable, then appellant [contractor] would be entitled to time extensions and thus remission of LDs [liquidated damages].

Appeal of – Maruf Sharif Construction Co.,ASBCA No. 61802, 2019 WL 410470 (2019) (internal citation and quotation omitted).

A contractor presenting a critical path analysis allocating delay may become imperative when seeking remission of a liquidated damages assessment and, potentially, proving its own entitlement to extended general conditions. Again, the burden falls on the contractor; therefore, not proving the impacts to the critical path and the excusable delay the contractor should be entitled to will likely result in the contractor failing to carry its burden.

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

Posted on June 18, 2016June 18, 2016 by Edward Garber

Liquidated damages are in many, many construction contracts. They are designed to capture an owner’s damages if a project, or portion thereof, is not substantially completed by an agreed date. The liquidated damages provision contemplates that the contractor will be liable for a daily rate of “x” for each day of delay beyond the substantial completion date (or any agreed change to this date). Sometimes there is a cap on the contractor’s liquidated damages exposure (say, capped at the contractor’s fee) and sometimes there is no cap. On private projects, the liquidated damages provision is a negotiated provision. Typically, on public projects, the liquidated damages provision is not negotiated, but is known upfront and the contractor can try to account for that risk in any bid or proposal.

Assume a project is completed 100 days beyond the agreed-upon substantial completion date. The contract provides for liquidated damages of $2,000 per day with no cap. This means the contractor has liquidated damages exposure in the amount of $200,000. The question, however, is who bears the burden relating to the 100-day delay that triggers the application of the liquidated damages provision. Understanding this burden is important, especially if you are the contractor looking to challenge this assessment and, perhaps, support a claim for extended general conditions / overhead.

The owner’s initial burden is typically an easy burden—known as the burden of persuasion. The owner really just needs to produce evidence that the project was not substantially completed by the agreed-upon date. Once the owner does this, the burden shifts to the contractor to prove that the owner prevented performance, there was excusable delay such as concurrent delay, or the owner caused the delay or a portion of the delay (e.g., design-changes, late change orders, etc.). The contractor will want to do this to not only establish it is not liable for a majority or all of the assessed liquidated damages, but that the owner is liable for the contractor’s extended general conditions / overhead associated with delay. Once the contractor does this, the burden of proof then shifts back to the owner since the owner carries the overall burden relating to its assessment of liquidated damages.

This sentiment was conveyed In the Armed Services Board of Contract Appeal’s decision in In re Idela Const. Co., ASBCA No. 45070, 2001 WL 640978 (ASBCA 2001) (internal quotations and citations omitted):

In order to assess liquidated damages the Government [owner] must prove by a preponderance of the evidence that the contractor is in default, that it did not prevent performance or contribute to the delay, and that the appellant was the sole cause of the days of delay. The Government has established that substantial completion did not occur until 109 days after the adjusted contract completion date.

In order to defeat the Government’s claim for liquidated damages, the appellant [contractor] must come forward with evidence to show that the Government prevented performance or contributed to the delay or that the delay was excusable. Because liquidated damages is a Government claim, the Government continues to have the overall burden of proof, and if the responsibility for days of delay is unclear, or if both parties contribute to the delay, for the Government [t]o recover liquidated damages the Government must prove a clear apportionment of the delay attributable to each party.

See also Sauer, Inc. v. Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) “(As a general rule, a party asserting that liquidated damages were improperly assessed bears the burden of showing the extent of the excusable delay to which it is entitled.); A.G. Cullen Const., Inc. v. State System of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006) quoting PCL Constr. Servs., Inc. v. U.S., 53 Fed. Cl. 479, 484 (2002) (“As to the applicable burden of proof in a liquidated damages claim, the government has “the ultimate burden of persuasion as well the initial burden of going forward to show that the contract was not completed by the agreed contract completion date and that liquidated damages were due and owing.”).

Remember, a liquidated damages provision is a common provision in construction contracts. Make sure you appreciate how this clause is triggered, the application of the clause, and who carries what burden when its comes to assessing and challenging liquidated damages.