Are You Being Assessed Onerous Liquidated Damages?
An Overview of Liquidated Damages In California
William C. Last, Jr.
Attorney At Law
If you are a public works general contractor, it is highly likely that your contract contains a clause that will subject you to an assessment of a fixed dollar amount for each day the project remains uncompleted after the contract completion date. Most general contractors will incorporate by reference the prime contract liquidated damage provision into the subcontract. Liquidated damage clauses typically define what constitutes completion. For example, beneficial occupancy by the owner may constitute completion for the purpose of a liquidated damage clause
Generally, owners add liquidated damage clauses to the prime contract since the damages they will sustain if there is a delay in completing the work are not readily ascertainable. For most private property owners the measure of damages for the contractor’s untimely completion of the project could include lost rental income during the delay period and/or interest on the owner’s purchase and construction loans.
Since the public works owner does not typically lease the finished building or borrow money from a conventional lender to build the delayed project, the measure of delay damages is difficult to measure. In essence, it is impractical or extremely difficult for the public owner to fix the actual delay damages. For that reason the public owner typically includes a liquidated damage provision in the construction contract.
California Statutes Allow Liquidated Damage Provisions
California Civil Code § 1671 states, in part, that a “provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” The foregoing section primarily applies to private contracts. The statute thus provides that liquidated damage clauses are presumed to be valid under California law.
However, the amount of the liquidated damages cannot be penal in nature. The amount set forth in the contract as liquidated damages must represent a reasonable endeavor by the parties to estimate a fair compensation for any loss that may be sustained; in absence of such relationship, contractual clauses purporting to predetermine damages must be construed as a penalty. The determination of whether or not the amount of liquidated damages in a construction contract is valid must be determined in accordance with facts and circumstances of each particular case.
On many occasions, the daily liquidated damage amount may be less than the actual daily damages an owner may sustain as a result of the delay in a project’s completion. As a result, some prime contracts will include both a liquidated damage clause and a clause that purportedly allows the owner to recover his other delay damages. In this author’s opinion such clauses are invalid since they violate the intent of Civil Code § 1671.
California Public Contract § 10226 provides that: “Every contract shall contain a provision in regard to the time when the whole or any specified portion of the work contemplated shall be completed, and shall provide that for each day completion is delayed beyond the specified time, the contractor shall forfeit and pay to the state a specified sum of money, to be deducted from any payments due or to become due to the contractor. The sum so specified is valid as liquidated damages unless manifestly unreasonable under the circumstances existing at the time the contract was made.”
Incidentally, the foregoing statute also provides that a contract for a road project, flood control project, or project involving facilities of the State Water Resources Development System may also provide for the payment of extra compensation to the contractor, as a bonus for completion prior to the specified time.
An Overview of Delay Claims
As earlier articles have noted, four elements must be satisfied before a contractor can recover delay damages. Those elements are: (1) the delay must be excusable, (2) the delay must be compensable, (3) the delay must be on the critical path, and (4) the delay must be non-concurrent. The same analysis can be applied to a contractors right to defeat liquidated damages.
Delays that excuse a contractor from performing within the contract period and justify an extension of time to perform are “excusable.” Whether delays are excusable generally depends on contract provisions. Force majeure, acts of God, unexpected weather, labor disputes, owner design problems, owner-initiated changes, and similar factors may cause excusable delays— the main consideration is whether the factors were beyond the contractor’s ability to control or foresee. Put another way, delays are generally excusable when another party caused but could have avoided them, or when they were due to environmental factors beyond the control or foresight of anyone.
Contract clauses generally determine whether delays are compensable or non-compensable. Different types of contract clauses attempt to limit compensability.
The third element concerns whether the delaying event was on the schedule’s critical path. Did the delay have an impact on the overall time for completion of the project as a whole? A delay may not impact the overall project completion date. If it does not, the delayed party may not be able to recover delay damages.
Comparison of as-planned and as-built schedules is the key method for determining if a delay is critical. Such a comparison allows the contractor or owner to determine which activities are critical to the earliest completion of the project.
Two or more independent delays during the same period are known as “concurrent delays.” When there are concurrent delays that are chargeable to the owner and contractor, courts are reluctant to allow an owner to recover liquidated damages.
Apportionment of Delays, Concurrent Delays and Notice Provisions
At the conclusion of the project it may become clear that the owner may also have delayed the completion of the project. California courts have attempted to resolve the question of how to apportion the delays between the owner and contractor relative to the assessment of liquidated damages. The issue of concurrent delays and apportionment of delays are two key defenses to liquidated damage claims.
The courts have rendered inconsistent decisions as to delayed parties’ rights to recover damages for concurrent, but independent delays. When there are delays by the owner and by the contractor that do not overlap, the issue of apportionment of the delay between the owner and contractor has arisen. Such an apportionment of liquidated damages would be based on subtracting the owner chargeable delays and the excusable delays from the days that the project went beyond the completion date. The remaining number of days would then be subject to an assessment of the daily liquidated damage sum.
In the context of liquidated damages some California appellate courts have held that liquidated damages cannot be assessed. See Aetna Casualty & Surety v. Board of Trustees (1963) 223 Cal App 2nd 337. In the Aetna case the court did hold, however, that the owner could recover its actual damages. In essence, the owner delays constituted a breach of contract which barred the owner from recovering liquidated damages. Some courts have attempted to apportion the damages from such delays among the delaying parties. See Nomellini Construction v. State (1971) 19 Cal. App. 3rd 240. Apportionment does not have to be exact, and can be complicated by criticality, excusability, and compensability factors. The best defense is proving that owner and contractor caused delays are truly concurrent and on the critical path.
As previously stated, if the owner’s acts or omissions are creating a concurrent delay, liquidated damages may not be assessable. In order to avoid that result owners often include contract clauses that require the contractor to notify the owner of any delays that may impact the completion date.
Such clauses are based on Civil Code § 1511 which states, in part: “The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate: 1. When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse; however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just;....”
As a general rule, contract provisions that cause forfeitures are closely reviewed by the courts. If the courts can interpret a contract clause so that it will avoid a forfeiture it will attempt to do so. That legal concept, among other, was applied in a case where the public owner delayed the project, assessed liquidated damages and argued that the contractor’s failure to comply with contract delay notification provisions precluded him from asserting concurrent delays. The court held that lack of notification was not a bar to the contractor asserting a defense based on concurrent delays. See Peter Kiewit Sons Co. V. Pasadena Junior College (1963) 59 Cal 2nd 241.
If delays are encountered during the course of construction, the contractor should comply with the contract delay notification clauses. If the contract does not contain a delay notification requirement, you should still notify the owner of any events that may impact the project completion date.
It is also advisable to prepare and update, on a monthly basis, project schedules. The schedules should include a detailed network diagram which sets forth the order of the project events, the duration, the interdependence of the construction activities and the sequence of the construction activities.
It should be standard practice on every project to maintain contemporaneous daily job logs documenting the project conditions and events. Logs should also be maintained to track Requests for Information, Submittals and Change Orders. The existence of such detailed and contemporaneous project documentation may be helpful in evidencing owner caused delays.
If you are being subjected to a liquidated damage claim, you should immediately consult with legal counsel who is knowledgeable about construction law. Your counsel may consider the following responses to the assessment of liquidated damages.
If you are assessed liquidated damages, you should create and review a project as-built schedule to determine if there are any concurrent delays. You should also review the contract definition of completion for the purpose of the assessment of liquidated damages.
While liquidated damage clauses and amounts are presumed to be valid, that presumption does not prevent a contractor from entering evidence that the daily amount is punitive in nature and therefore invalid. But many times the actual damages an owner sustains as a result of a delay may be less than the liquidated damage amount. If the contract includes clauses that seek to include liquidated damages and the owner’s actual damages, the contractor must consider which measure of damages is the lesser of two evils.
If the owner delays the project, but those delays are not concurrent, the contractor may be entitled to more than an extension of time to complete the project. Under such circumstances, the contractor may want to consider a claim for extended job site and home office overhead during those periods. Those damages may then be an offset claim against the liquidated damages.
In closing, the best defense against liquidated damages is ongoing monitoring of the project’s scheduling status. When a delaying event is encountered and it is the owner or the owner’s agents responsibility, promptly notify the owner of that event and the impact on the completion date. If the delaying event is your responsibility track the impact of the delay on the critical path.
This article, ©2001, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.