Tag Archives: liquidated damages burden

CHALLENGING ENFORCEABILITY OF LIQUIDATED DAMAGES (IN FEDERAL CONSTRUCTION CONTEXT)

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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.

 

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

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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.

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.