The assessment of liquidated damages should be a consideration to contractors on all projects, specifically public (federal and state) projects where the prime contract routinely contains a liquidated damages provision for delays to the completion of the project.  Many times, the subcontract will contain a provision that will allow the prime contractor to pass-through liquidated damages assessed by the government (owner) to the responsible subcontractor.  Well, what if the government did not assess liquidated damages?  Can the prime contractor still assess liquidated damages against a responsible subcontractor in accordance with the subcontract?  The opinion in U.S. f/u/b/o James B. Donahey, Inc. v. Dick Corp., 2010 WL 4666747 (N.D.Fla. 2010), would allow a prime contractor to assess liquidated damages against a subcontractor even if the government did not assess liquidated damages against the prime contractor.

In this case, a prime contractor entered into a contract to design and build four buildings at the Pensacola Navy Station and provided a Miller Act payment bond.  The prime contractor hired a subcontractor to perform the plumbing and mechanical work.   Due to delays the general contractor believed were caused by the subcontractor, it withheld substantial payment from the subcontractor.  The prime contractor contended that the subcontractor caused 63 days of delay to the occupancy of the Visitors Quarters building and 32 days of delay to the Aviation Rescue Swimmers School building.  The subcontract provided that in the event of delays, liquidated damages would be assessed in the amount of $5,400 per day for delay to the Aviation Rescue Swimmers School and $24,898 per day for delay to the Visitors Quarters.

The subcontractor filed a Miller Act lawsuit against the prime contractor and its surety (amongst other causes of actions).  The prime contractor filed a counterclaim based on the liquidated damages that it assessed against the subcontractor, an amount in excess of what it was withholding.  The subcontractor moved for summary judgment arguing that the liquidated damages provision was unenforceable (and the prime contractor could not assess liquidated damages) because the provision was a pass-through provision; thus, because the government did not assess liquidated damages against the prime contractor, the prime contractor could not assess liquidated damages against the subcontractor.  The subcontractor further argued that the liquidated damages provision is unenforceable because it is being treated as a penalty because the subcontractor is not being provided the benefit of extensions of time granted by the government to the prime contractor that would negate delays.   The prime contractor countered that nothing in the subcontract stated that liquidated damages could only operate as a pass-through claim, that being that the government had to assess liquidated damages before the prime contractor could assess liquidated damages against the subcontractor.  The prime contractor further countered that the extensions of time granted by the government were irrelevant since they did not pertain to the subcontractor’s scope of work or affect the subcontractor’s milestone completion dates.

The Northern District of Florida agreed with the prime contractor and denied the subcontractor’s motion for summary judgment because it found the liquidated damages provision enforceable.  The Northern District explained as it pertained to the subcontractor’s Miller Act payment bond claim:

 

“In considering a Miller Act claim, the trier of fact must thus look to the subcontract to determine the amount due. ‘[I]f the subcontract provides for a condition precedent to payment, or a part thereof, which is not fulfilled, the subcontractor cannot recover labor and material expenditures against the surety on the payment bond.’ In other words, if there has been a default by the subcontractor, the general contractor may assert recoupment or setoff as a defense. Because there is a genuine issue of material fact regarding the timeliness of Donaghey’s [subcontractor] performance and, therefore, Donaghey’s entitlement to the amounts withheld by Dick [prime contractor], summary judgment is inappropriate as to Donaghey’s Miller Act claim.”

Dick Corporation, 2010 WL at *3 quoting U.S. f/u/b/o Harrington v. Trione, 97 F.Supp. 522, 527 (D.C.Colo. 1951).

Stated differently, the Miller Act payment bond surety was entitled to rely on the prime contractor’s assessment of liquidated damages as a set-off  / recoupment defense  to the subcontractor’s Miller Act claim.  Also, if there were other conditions precedent that the subcontractor failed to comply with, the Miller Act surety would be entitled to many of these defenses as well.

 The Northern District further maintained that a liquidated damages provision under Florida law will be enforceable if the provision does not operate as a penalty, meaning damages upon a breach must not be readily ascertainable at the time of the contract and must not be grossly disproportionate to any damages reasonably expected to follow from the breach.  Dick Corporation, 2010 WL at *4 quoting Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20, 21 (Fla. 4^th DCA 2008). The Court held that the liquidated damages provision did not operate as a penalty and it was not intended to operate only as a pass-through mechanism.  See, e.g., U.S. f/u/b/o Sunbeam Equip. Corp.  v. Commercial Constr. Corp., 741 F.2d 326, 328 (11^th Cir. 1984) (“The fact that the Navy did not assess liquidated damages as such against Commercial [prime contractor], would not foreclose recovery of delay damages, if Commercial could demonstrate that damages arising out of the subcontract with Sunbeam [subcontractor] were not otherwise compensated.”) 

There are three important take-aways from this opinion:

• Liquidated damages provisions in subcontracts can operate as more than a pass-through provision for liquidated damages assessed by the government (owner).  These provisions can operate as a mechanism to assess liquidated damages against the subcontractor even if the government / owner has not assessed liquidated damages against the prime contractor.  Prime contractors and subcontractors need to keep this in mind when drafting and negotiating liquidated damages provisions.  If the intent is for the provision to only operate as a pass-through provision, this intent should be clearly stated in the subcontract.  If the intent is for it to operate more than as a pass-through provision, then this risk needs to be considered by the subcontractor.

• Liquidated damages are typically going to be deemed enforceable if they are not intended to operate as a penalty.

• A Miller Act payment bond surety will be entitled to rely on set-off / recoupment affirmative defenses contained within the subcontract including, without limitation, the prime contractor’s assessment of liquidated damages or other delay damages against the subcontractor pursuant to the subcontract.

 

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.