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By: Gail S. Kelley, P.E., J.D.
ConstructionRisk, LLC

Where a contractor amended its complaint in an action against the United States to include a claim for remission of liquidated damages on the basis that it was entitled to a time extension, but the contractor did not explain why it was entitled to a time extension in its original letter to the contracting officer, the court had no jurisdiction over the claim. The contractor’s original letter did not contain sufficient details to establish a claim for an extension of time; the contractor could not cure this defect by sending a second letter to the contracting officer after litigation had begun. K-Con Bldg. Systems, Inc. v. U.S., 778 F.3d 1000 (2015).

BACKGROUND

This dispute arose from a contract with the Coast Guard to construct a support team building in Port Huron, Michigan. The contract, which was for $582,64, included liquidated damages of $589 for each day of delay in completion. The Coast Guard accepted the building as substantially complete on May 23, 2005, but withheld $109,554 as liquidated damages for 186 days of delay. The contractor, K–Con, subsequently sent a letter to the contracting officer requesting remission of the liquidated damages, asserting that the “liquidated damages constituted an impermissible penalty” and the Coast Guard “failed to issue extensions to the completion date as a result of changes to the contract.” However, K-Con provided no details regarding its request for time extensions.

When the contracting officer denied K–Con’s request for remission, K–Con sued in the Court of Federal Claims under the Contract Disputes Act (CDA).   K–Con sought remission of the $109,554 in liquidated damages plus interest; it also requested additional compensation based on work performed in response to government requests that it alleged amounted to contract changes.

After litigation had begun, K–Con submitted a second letter to the contracting officer. This second letter detailed the contract changes allegedly made by the Coast Guard and asked for a new remedy—$196,126.38 for additional work necessitated by the changes—and an extension of the completion date of the contract. When the contracting officer denied K–Con’s requests, K–Con amended its complaint in the Court of Federal Claims to add these allegations and to seek, in addition to the liquidated-damages relief, a judgment of $196,126.38 and a 186–day extension.

The Court of Federal Claims held that the liquidated-damages clause was enforceable and that K–Con did not comply with the written-notice precondition for invoking the contract clause governing changes. It also dismissed K–Con’s claim for an extension on the completion date for lack of jurisdiction.  K–Con appealed and the Court of Appeals for the Federal Circuit affirmed all three rulings.

No Jurisdiction over Claim of Failure to Grant Time Extension

Before addressing the merits of the claims, the Appeals Court examined whether the Court of Federal Claims had jurisdiction over each of K-Con’s claims:

“Identifying what constitutes a separate claim is important. We have long held that the jurisdictional standard must be applied to each claim, not an entire case; jurisdiction exists over those claims which satisfy the requirements of an adequate statement of the amount sought and an adequate statement of the basis for the request.”

The Appeals Court found that the Court of Federal Claims did not have jurisdiction over K-Con’s second claim, which challenged the Coast Guard’s failure to grant an 186-day time extension, stating:

At bottom, the time-extension claim is a request for remission of liquidated damages on the ground that the Coast Guard failed to issue time extensions for additional work added to the contract. K–Con squarely placed that claim in litigation through its original complaint, which means that K–Con had to present that claim adequately in its first letter, not in the post-suit second letter. But the first letter plainly fails to allege enough detail to provide adequate notice of the basis for any time extension.

In its discussion of jurisdiction, the Appeals Court noted:

Claim identification is important also for application of the rule that, once a claim is in litigation, the contracting officer may not rule on it—even if the claim is not properly in litigation because it was not properly submitted to and denied by the contracting officer before it was placed in litigation….. Once a claim is in litigation, the Department of Justice gains exclusive authority to act in the pending litigation … divesting the contracting officer of his authority to issue a final decision on the claim.

Failure to Provide Required Notice of Alleged Changes to the Contract

The Appeals Court found that the Court of Federal Claim did have jurisdiction over the claim K–Con added in its amended complaint seeking compensation for additional work it performed because of the Coast Guard’s alleged constructive changes to the contract. While the original complaint mentioned contract changes and included some factual assertions shared by the contract-changes claim presented in the second letter, the remedy requested in the two documents was different: the original complaint asked for remission of liquidated damages, whereas the second letter asked for compensation for extra work. That was enough to make the requests different claims.

However, the contract required the contractor to give notice within 20 days of receiving an order it considered to be a change order. Throughout the period that the Coast Guard was allegedly making changes, K–Con never objected to the Coast Guard’s actions or suggested that it was entitled to an adjustment of contract terms. Rather, K–Con expressed its intent to incorporate the Coast Guard’s requests as though they were consistent with the terms of the contract. Only in its second letter to the contracting officer—more than two years later— did K–Con provide the required written notice of the “date, circumstances, and source” of the orders it objected to and indicate that it regarded the orders as change orders.

The court noted that:

[T]he notice provision serves an important purpose in a contract in which some government requests are plainly contemplated under the contract. Timely written notice differentiates requests the contractor views as outside the contract from those it deems contemplated by the contract. And it gives the government timely notice of what amounts it might be on the hook for, so that it will not be surprised by money claims later, as well as an opportunity to address demands for more money when it might yet avoid them.

Although K-Con argued that it did not have to comply with the notice provision of the changes clause because compliance would have been futile, the court found this argument unpersuasive.

“Even if a futility exception exists …K–Con’s argument fails because it has not shown that compliance would have been futile. The Coast Guard never stated or implied in advance that it would reject allegations of contract changes. . it is unknown what would have happened had K–Con broached the issue of changes around the time the Coast Guard made the work requests at issue. The submission of the second letter prompted the Coast Guard to make a choice between giving in to K–Con’s demands or subjecting itself to further litigation; timely objections would have presented a very different choice between at least four options—refraining from making requests regarding K–Con’s work, altering the nature of the requests, keeping the requests the same but making equitable adjustments to the contract, or rejecting the allegations of changes altogether and thereby risking litigation or a halt to the project.”

Liquidated Damages Clause is Enforceable

The Appeals Court agreed with the Court of Federal Claims that the liquidated-damages clause was enforceable, noting:

“When damages are uncertain or difficult to measure, a liquidated damages clause will be enforced as long as the amount stipulated for is not so 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. …regardless of how the liquidated damage figure was arrived at, the liquidated damages clause will be enforced if the amount stipulated is reasonable for the particular agreement at the time it is made.”

The Appeals Court dismissed K–Con’s allegation that the Coast Guard made errors in arriving at the figure of $589 as immaterial:

“Even if the alleged errors were made, the ultimate rate of $589 per day is reasonable. At the time of contracting, it was foreseeable that delay would create a number of costs for the Coast Guard, including costs for travel, inspection, and other work by government personnel—all continuing beyond the date by which such activities for this contract should have ended.”

Likewise, the Appeals Court found K–Con’s argument that Coast Guard personnel did not work any more hours or get paid any more due to the delay was meritless:

“It is reasonable to expect that delay, if it occurs, will require personnel to devote more time and resources to the project than they would have if the project had been completed on time. Moreover, even if the same personnel might work the same number of hours regardless of delay, it is reasonable to expect that delay would force them to reallocate their hours and impair their ability to give planned attention to other projects, to the detriment of those other projects.”

Comment

Under the CDA, requests for different remedies, whether monetary or non-monetary, or requests that assert grounds that are materially different from each other are considered separate claims. Thus presenting a materially different factual or legal theory creates a different claim, but merely adding factual details or legal argumentation does not.

The Appeals Court recognized that K-Con’s claim for an extension of time was simply another way of requesting a remission of the liquidated damages that had been withheld. The issues underlying the claim had thus been presented to the CO before the start of litigation and were included in the original complaint. In order to add the claim to the complaint, K-Con would need to get a final decision on the claim from the contracting officer. However, once issues have gone to litigation, the contracting officer can no longer issue a decision on them. The Court of Federal Claims therefore found it had no jurisdiction over the claim for an extension of time that was raised in the amended complaint because there was no final decision from the contracting officer.

This case also stresses the importance of notice requirements of the contract. It is vital that contractors pay attention to notice requirements and adhere to them in order to preserve their right to an equitable adjustment.

 

About the Author:  As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performedconstructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court.  She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law.  She provides risk management services for ConstructionRisk, LLC.   This article is published in ConstructionRisk.com Report, Vol. 17, No. 4 (June/July 2015).

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