Contractor’s Burden When It Comes To Delay

David Adelstein | Florida Construction Legal Updates

When a contractor is challenging the assessment of liquidated damages, or arguing that it is entitled to extended general conditions, the contractor bears a burden of proof to establish there were excusable delays that impacted the critical path and, in certain scenarios, the delays were not concurrent with contractor-caused delay:

When delays are excusable, a contractor is entitled to a time extension, such that the government may not assess liquidated damages for those delays.  The government bears the initial burden of proving that the contractor failed to meet the contract completion date, and that the period of time for which the government assessed liquidated damages was correct. If the government makes such a showing, the burden shifts to the contractor to show that its failure to timely complete the work was excusable. To show an excusable delay, a contractor must show that the delay resulted from “unforeseeable causes beyond the control and without the fault or negligence of the Contractor.”  “In addition, the unforeseeable cause must delay the overall contract completion; i.e., it must affect the criticalpath of performance.” Further, the contractor must show that there was no concurrentdelay.

Ken Laster Co., ASBCA No. 61292, 2020 WL 5270322 (ASBCA 2020) (internal citations omitted).

Arguing delay without understanding your burden of proof obligations will be problematic, as the contractor in Ken Laster found out.  In this dispute, a contractor was issued task orders to repair, prepare and plaint certain floating structures pursuant to task orders.  The contractor was liable for liquidated damages if it did not timely complete the work.  The contractor completed the work 289 days late and the government assessed liquidated damages.  The contractor challenged the assessment of liquidated damages. However, the contractor did NOT show how anything it claimed the government did to delay completion impacted the critical path or that there was no concurrent delay.  Without such showing, the contractor was unable to establish that liquidated damages were improper as it was unable to show there was excusable delay or that the delay to the critical path it caused was concurrent with an owner-caused delay to the critical path.

Remember, if you are a contractor challenging the assessment of liquidated damages and/or claiming you are entitled to delay damages (extended general conditions), you have a burden of proof.  You will want to establish that there was excusable delay, i.e., owner-caused delay, that impacted the critical path of the project resulting in the delay to the completion date, and the excusable delay was not concurrent with delay you caused to the completion date.  This burden will routinely require expert opinion that will need to analyze schedules and contemporaneous project documentation to render these opinions (that there was excusable delay, the delay impacted the critical path, and in certain scenarios, the excusable delay was not concurrent).   It is important to note, however, that if you are able to establish there was concurrent delay, you would still typically be entitled to a time extension, however, you would not be entitled to compensation for the delay (extended general conditions).  But, the burden is still on you to establish there was concurrent delay.

Issues Impacting Enforceability of Liquidated Damages in Construction Contracts

Luke Tompkins | Ward and Smith

Liquidated damages provisions are common in construction contracts to guard against damages that the owner or a contractor might suffer if a project is delayed beyond the completion date set forth in the contract.  These provisions appear in both public and private construction contracts.  Oftentimes, the owner of a construction project will include a liquidated damages provision in the prime contract with the general contractor.  The provision might state, for example, that if the project is delayed beyond the required completion date, the owner may assess against the general contractor liquidated damages in the amount of $1,000.00 per day until the project is complete.  The general contractor, in turn, will likely include a similar clause in its subcontracts passing along the risk of liquidated damages to its subcontractors if delays to the completion of the project are caused by the acts or omissions of the subcontractor.

Liquidated damages provisions are helpful because they establish the damages for construction delays at the outset of the project and eliminate the need to prove actual damages.  The party whom the liquidated damages clause benefits need only prove that the performing party delayed completion of the project to be entitled to recover the amount of damages listed in the contract.  In the absence of a liquidated damages provision, to recover damages for delay, an owner or contractor has to prove both that the contractor delayed the project and the actual damages that were caused by the delay.  Demonstrating actual damages is a difficult task that requires detailed proof that ties the loss to the period of undue delay with reasonable certainty.  Thus, being able to rely on liquidated damages for delay provision can be quite useful.

Liquidated damages clauses are generally enforceable, but most courts will not enforce a liquidated damages provision if (1) it constitutes a penalty as opposed to a reasonable estimate of the actual damages likely to be incurred due to delay, or (2) the party benefitting from the liquidated damages clause is responsible for a portion of the delay to completion of the project and the contract does not provide for apportionment of damages in the case of mutual delays.

I. Liquidated Damages vs. Unenforceable Penalty

North Carolina courts recognize a two-pronged test for determining whether liquidated damages are enforceable or constitute a penalty: (1) the damages from the breach of contract must be difficult to ascertain as of the time the parties entered the contract; and (2) the amount of damages stipulated must either be a reasonable estimate of the damages which would probably be caused by a breach or reasonably proportionate to the damages actually caused by the breach.  If the party disputing liquidated damages can prove either that actual damages were not difficult to ascertain or that the liquidated damages were not a reasonable estimate of actual damages and were not reasonably proportionate to the actual damages, the liquidated damages provision will not be enforced.

To show that damages were not difficult to ascertain, the party opposing liquidate damages has to show that there was a clear, objective basis for measuring all aspects of the actual damages that might result from the breach.  This is an extremely steep challenge in the context of liquidated damages for delays to construction projects.  First, North Carolina courts give substantial weight to stipulations by the parties in the contract that damages are difficult to ascertain.  Therefore, if the contract includes a clause stating that both parties agree the measure of damages that will result from project delays is difficult to ascertain, this will usually suffice to demonstrate that damages were in fact difficult to ascertain.  Second, courts often find that damages are difficult to ascertain when the project at issue is complex or involves a large undertaking, as is often the case with construction projects.  Lastly, delays in the completion of construction projects generally bring in to play many potential items of damages, including lost profits due to not opening the completed project on time, continued costs associated with operating other facilities that the project was meant to replace, increased costs of construction, etc.  Thus, it is unlikely that the party opposing liquidated damages for delays on construction projects will be able to show that damages were not difficult to ascertain at the time of contracting.

To demonstrate that liquidated damages are not a reasonable estimate of actual damages and that they are unreasonably disproportionate to actual damages, the party opposing liquidated damages must show that there was no reasonable attempt to estimate damages prior to contracting and that liquidated damages are shockingly excessive when compared to the actual damages suffered and the overall value of the contract.  As with the first prong, courts will generally defer to the parties if the parties stipulate that the amount of liquidated damages is a reasonable estimate of the damages that will likely result from delays to project completion.  If such a stipulation exists, this will be difficult to overcome, so contractors and subcontractors should refuse to sign such a stipulation if you believe the amount of liquidated damages is unreasonable.

Next, because liquidated damages are meant to approximate actual damages, courts will consider whether the liquidated damages amount is based on a reasonable estimate of actual damages made by the owner or contractor, or whether the liquidated damages amount was simply a random arbitrary amount.  Lastly, the court will look to whether liquidated damages are shockingly disproportionate to actual damages.  Courts have held that liquidated damages twice the amount of actual damages were reasonably proportionate to actual damages.  Thus, the party opposing liquidated damages will need to show that liquidated damages far exceed actual damages to succeed in having them ruled an unenforceable penalty.

In conclusion, contractors or subcontractors opposing liquidated damages for delays to construction projects face a difficult task in demonstrating that a liquidated damages clause is an unenforceable penalty.  It is nearly impossible to show that delay damages were not difficult to ascertain at the time of contracting.  However, if the contractor or subcontract can show that the liquidated damages amount was an arbitrary amount that far exceeded actual damages, a court may conclude that the liquidated damages constitute an unenforceable penalty.  On the other hand, owners and contractors can likely avoid having liquidated damages for delay clauses overturned as unenforceable penalties if the liquidated damages amount reflects a sincere attempt to estimate actual damages and their contract includes stipulations that actual damages are difficult to ascertain and that the liquidated damages amount is a reasonable estimate of actual damages.

II. Mutual or Concurrent Delays by Contracting Parties

Under North Carolina law, it is clear that the party benefitting from a liquidated damages provision cannot recover liquidated damages if it is responsible for all of the delays to the project.  In addition, North Carolina law states that liquidated damages are unenforceable if the party benefitting from the liquidated damages was itself responsible for a portion of the delays to project completion unless the contract contains a clause providing for apportionment (i.e. division) of liquidated damages in the case of mutual delays.  This rule, which I’ll refer to as the “Non-Apportionment Rule,” was recognized by the North Carolina Supreme Court in 1967.  Under the Non-Apportionment Rule, if the owner or contractor whom the liquidated damages clause benefits is responsible for any amount of the delays to project completion, they cannot recover liquidated damages unless the contract authorizes project delays to be apportioned between the parties so that liquidated damages can be assigned to the contractor or subcontractor based on the delays they are responsible for.  In other words, an owner’s or contractor’s responsibility for a portion of the project delay can result in not being able to recover liquidated damages for delays caused by the performing party.  Notably, there is a trend among other jurisdictions away from the Non-Apportionment Rule because some courts have found it to be overly harsh.  North Carolina’s Non-Apportionment Rule, however, has never been overruled and was applied by the North Carolina Court of Appeals as recently as 2007. 

Based on the Non-Apportionment Rule, mutual delays can serve as a basis for complete avoidance of liquidated damages where the contract does not authorize apportionment of liquidated damages.  Thus, parties seeking to avoid or enforce liquidated damages should be aware of the Non-Apportionment Rule.  Owners or contractors seeking the benefit of liquidated damages provisions should consider including a provision in your contract for apportionment of liquidated damages in the case that both parties are responsible for delays (i.e. there are mutual or concurrent causes of delay).  If an apportionment clause is included in the contract, the performing party should negotiate for any apportionment of delays to be administered by a neutral third party, so as to eliminate any bias in dividing the delays among the parties.  If it is not included, the performing party should seek to prove mutual delays as an avenue to avoid liability.  In either case, both parties should be sure to document and collect evidence of all delays which you contend the owner, contractor, or a subcontractor has caused to the project as you may need this evidence to either establish your right to liquidated damages or to escape or minimize your liability for liquidated damages. 

Conclusion

In conclusion, liquidated damages clauses provide a helpful remedy to the party harmed by delay in circumstances where calculating actual delay damages is difficult.  Liquidated damages, however, will not be enforced if they do not reflect a reasonable estimate of actual damages and are grossly excessive in comparison to actual damages.  Additionally, unless the contract provides otherwise, liquidated damages for delays will not be enforced by the courts if the party seeking enforcement is responsible for some of the delay at issue.  Participants in the construction industry should keep these issues in mind when negotiating and entering into construction contracts.

Delay Days for Liquidated Damages May Be Apportioned Where Permitted by Contract

Geoff F. Palachuk | Lane Powell

Overlapping delays partly caused by a contractor and partly by an owner — known as concurrent delays — typically nullify the assessment of liquidated damages in a breach of contract dispute. But a contractor generally will be held liable for liquidated damages if the contractor cannot establish proof of concurrent or owner-caused delays affecting the critical path. Where the parties’ contract provides for the allocation of fault for delays, a trier of fact must analyze each delay day in order to apportion fault. In Lake Hills Investments, LLC v. Rushforth Construction Co., Inc., Division One of the Washington Court of Appeals clarified the rule for apportionment of liquidated damages, and held that factfinders can apportion delay days for liquidated damages between the contracting parties, where allowed by contract, depending on each party’s respective fault for causing delays.

The court in Lake Hills examined a jury’s assessment and apportionment of liquidated damages by the owner (Lake Hills) against the contractor (AP) for a project in Bellevue. The project was constructed in several phases. AP did not timely complete the project, with delays ranging from 300-500 days for multiple phases.

At trial, Lake Hills sought to assess liquidated damages of $2,500 per day for delays on each phase that were caused by the conduct of AP or its agents. The jury instruction at issue allowed the factfinder to excuse AP for any delays that AP, alone, did not cause. Although the law typically requires that a general contractor like AP carry the burden of proving such delays were the fault of concurrent or owner-caused delays, the jury instruction provided AP with a negative burden of proof focused on contractor-caused delays.

The court of appeals acknowledged that negative phrasing. Without addressing the issues related to each party’s respective burden of proof, however, the court reasoned that the parties’ contract allowed apportionment of delays. The court determined that liquidated damages could be assessed under the contract by “examining each day of delay, identifying the cause of delay, and adding or subtracting delay days based on the conduct of each party and its agents.” The court adopted the modern rule of “a ‘strong majority’ of jurisdictions” that a factfinder can apportion liquidated damages between the contracting parties, where allowed by contract, depending on the relative allocation of fault in causing those delays.

The jury was instructed to excuse AP from any delay days “not solely caused by AP.” But the court of appeals determined that instruction did not reflect the parties’ contract. The court reasoned that “[t]he instruction let the jury excuse AP from any day of delay caused by anything other than itself, including its own agents.” The jury instruction also did not account for any delays caused by AP’s agents, subcontractors, material suppliers, consultants, etc., which normally constitute delays attributable to the general contractor. The trial court provided the narrower and negatively-phrased jury instruction, and the jury ultimately found “AP was not the ‘sole’ cause of 90 percent of the delay on the project.”

The court of appeals held the instruction “misled the jury without misstating the law,” but the court also determined that Lake Hills suffered no prejudice. Notwithstanding the appellate court’s ruling on this issue, the case was ultimately reversed and remanded for a new trial on other grounds. 

The lesson from this case is that delay days may be apportioned to the contracting party found at fault for the cause of delay. That rule had not been clarified by the Washington appellate courts for nearly two decades. However, the decision in Lake Hills also should not change a contractor’s burden of proof at trial. In order to overcome or nullify the assessment of liquidated damages during trial, a contractor must establish proof of either concurrent or owner-caused delays that affect the critical path. Delays that affect the critical path extend the overall length of construction. Only then, where the delays are attributable to such concurrent or owner-caused delays, a factfinder may apportion delay days to determine the proper assessment of liquidated damages. 

Reasonableness of Liquidated Damages Determined at Time of Contract (or, You Can’t Look Back Again)

Christopher G. Hill | Construction Law Musings

I’ve discussed the continuing litigation between White Oak Power Constructors v. Mitsubishi Hitachi Power Systems Americas, Inc. previously here at Construction Law Musings because the case was another reminder that your construction contract terms matter and will be interpreted strictly here in the Commonwealth of Virginia.  The prior opinion in this case from the Eastern District of Virginia court the Court considered the applicability of a liquidated damages provision.  In the latest opinion from the Court (PDF) the Court looked at when and how any liquidated damages would be calculated.  In its June 22, 2020 opinion, the Court put the issue as follows:

White Oak’s motion for partial summary judgment presents a narrow issue: whether courts may consider the damages actually sustained by a party as a result of a contract breach when deciding if liquidated damages required by a contract “grossly exceed” a party’s actual damages.

Mitsubishi argued that White Oak could not enforce the liquidated damages provisions of the contract (all of which are laid out in the opinion linked above) because the liquidated damages were not reasonable and “grossly exceeded” the actual damages incurred by White Oak because of project delays allegedly caused by Mitsubishi.  Mitsubishi argued that the Court must look retroactively at the actual damages incurred when determining whether the liquidated damages constituted a penalty.  White Oak argued that the Court should look proactively at what the parties thought damages could be at the time of contracting.  After a thorough review of Virginia law, the Court agreed with White Oak and stated:

[c]ourts applying Virginia law must consider the actual damages contemplated at the time of contract when determining the reasonableness of a liquidated damages provision. Moreover, the fact that courts must focus on the intent of the parties based on the circumstances at the time of contract formation further supports applying the prospective approach. Accordingly, Mitsubishi may not challenge the liquidated damages provision based on the damages White Oak suffered after the alleged delays occurred.

In short, when drafting or reviewing liquidated damages provisions for your construction contracts with the assistance of an experienced Virginia construction lawyer, be sure to have them be “indexed” to the prospective damages the parties reasonably consider to be possible when the contract is made.  You are not likely to win an argument after the fact-based upon the actual damages incurred.

As always, I recommend that you read the entire opinion for yourself and draw your own conclusions.  Also, please let me know with a comment if you have any thoughts on my analysis.

Mutual or Concurrent Delay Caused by Subcontractors

David Adelstein | Florida Construction Legal Updates

How are delay damages treated when two subcontractors cause a mutual or concurrent delay to the project?

Assume multiple subcontractors concurrently contributed to an impact to the critical path resulting in a delay to the project.  The delay caused the prime contractor to: (1) be assessed liquidated damages from the owner and (2) incur extended general conditions.  The prime contractor will be looking to the subcontractors for reimbursement for any liquidated damages it is assessed along with its extended general conditions costs.

There is really no great case that addresses this point when two (or more) subcontractors mutually or concurrently delay the project.  It is also not uncommon, and frankly expected, that a subcontractor will point the finger at another subcontractor for the cause of the delay or that another subcontractor was concurrently delaying the project.

The prime contractor should absolutely, without any exception, undertake efforts with a scheduling consultant to allocate the delay caused by subcontractors.  Taking an approach that joint and several liability applies between multiple subcontractors and/or not trying to apportion delay because the subcontractors concurrently delayed the critical path at the same time is probably not the best approach. The prime contractor should have an expert render an opinion as to the allocation of the delay period amongst responsible subcontractors that delayed the critical path. Not doing so, in my opinion, is a mistake.

For example, in the unpublished decision in Alcan Electrical & Engineering Co., Inc. v. Samaritan Hosp., 109 Wash.App. 1072 (Wash. 2002), a dispute arose between a general contractor and its electrical subcontractor on a hospital project.  The general contractor looked to recoup assessed liquidated damages caused by the electrical subcontractor.   The project was 201 days late attributable to the electrical subcontractor and, largely, the mechanical subcontractor. The trial court determined that the electrical subcontractor was only liable for 31 days of delay.

An appeal arose because the general contractor wanted to hold both subcontractors jointly and severally liable for the 201 days of delay. The Washington Court of Appeals was not accepting this argument.  Instead, it held that that the amount of delay attributable to the two subcontractors is a question to be resolved by the trier of fact.  This is exactly what the trial court did by finding that of the 201 days of delay, 31 days of delay was caused by the electrical subcontractor while the remaining 170 day of delay was caused by the mechanical subcontractor.

But, in another example from an unpublished decision, U.S. el rel. Belt Con Const., Inc. v. Metric Const. Co., Inc., 314 Fed.Appx. 151 (10th Cir. 2009), a general contractor looked to allocate liquidated damages to its masonry subcontractor due to delays to the construction of a federal training center.  The subcontract allowed the general contractor to equitably allocate delay damages among subcontractors as long as its decision was made in good faith.  The trial court, affirmed by the appellate court, found that the general contractor did not allocate the damages in good faith because the initial delay analysis it performed was submitted to the owner and allocated ALL of the delay to the owner.  Then, for purposes of trial, it simply adopted its trial expert’s analysis that allocated delay to subcontractors.  This issue alone hurt the contractor and, importantly, its expert’s credibility at trial.  (This is a reminder that there should be ONE delay analysis for the project and what is presented to the owner should not be conflicted with by delay analysis separately presented to subcontractors.)

Moreover, the court, applying California law, found that there was no law that supported the apportionment of a true concurrent delay. But, in my opinion, this did not make much sense because at trial both the general contractor and subcontractor’s experts rendered opinions allocating the delay caused by the culpable subcontractors.

Irrespective of the Court’s decision in this case, the best approach, mentioned above, is to allocate the delay period.  Thus, if two subcontractors mutually contributed to a 30-day window of time, an expert should be used to analyze that 30-day window of time to allocate the days to the two subcontractors.  Again, taking the approach that joint and several liability should apply or that an allocation is not necessary is a mistake.