Kent Holland, J.D.
Where a contractor was late in performance, a town terminated the contract for convenience and subsequently claimed liquidated damages (LDs) against the contractor. Both the trial court and appellate court concluded that the town’s election to exercise the termination for convenience clause of the contract did not forfeit its right to claim liquidated damages. In addition, the town was not required to prove that it suffered actual damages or the amount of damages suffered. Change orders in which the contractor made reference to future entitlement for time extensions, because owner caused part of the delays, failed to satisfy the contractually imposed notice requirements for submitting a claim, and therefore did not relieve the contractor from LDs. Old Colony Construction, LLC v. Town of Southington, 113 A.3d 406 (Connecticut 2015).
The contractor argued that the town was barred from collecting LDs because (1) the termination for convenience precluded any default based remedies, such as LDs, that might have otherwise been available to the town, and (2) the town contributed to the delay.
Notice Requirements not Satisfied to Preserve Delay Claim
The argument about town contribution to the delay was quickly disposed of by the appellate court finding that to make that argument the contractor was required to have made a detailed formal notice of request for equitable adjustment when it was being impacted. The contract had a set procedure for doing so. Although the contractor received certain change orders that itemized unit costs for additional work, the contractor merely included on the order directly above the cost details, a heading of description that the court said “noted … the impact to the schedule had not been determined and that additional time was warranted or would be incorporated into the schedule. Nothing in the change orders indicated how much additional time would be warranted or whether further documentation would be necessary.” This, said the court, did not constitute mutual assent by the town that additional time would be granted. As seen by the court, the contractor filed to strictly comply with the notice and claim requirements for obtaining adjustments due to delay. The approved change orders did not preserve a time extension claim under the circumstances.
Liquidated Damages Not Eliminated by Termination for Convenience
The contractor argues that as a general principle a project owner cannot legally terminate a contract for convenience but also claim liquidated damages as though the contract had been terminated for default. The court considered that argument but decided regardless of the “abstract proposition” of law argued by the contractor, “the present case is governed by the express terms a contract under which the town may recover liquidated damages.”
The liquidated damages provision of the contract stated that the parties recognized that time is of the essence of the agreement and that the town would suffer financial loss if the work was not completed within the times specified. The clause also stated that the parties recognized the delays, expense, and difficulties involved in proving the actual loss suffered by the town if work was not completed on time and stated, “Accordingly, instead of requiring such proof, [the town] and contractor agree that as liquidated damages for delay (but not as a penalty) [contractor] shall pay [the town $400] for each day that expires after the time specified … for substantial completion.”
After the contractor was seriously late in performance, the town opted to terminate the contract for convenience. In doing so it relied upon a contract clause that provided, “Upon seven days written notice to [contractor] and ]the project engineer], [the town] may, without cause and without prejudice to any of the right or remedy of [the town], elect to terminate the contract.” Applying this language about preserving its rights, the court found that the preservation of remedies must be given full effect absent evidence of a more limited intent that was not shown here.
In holding that the termination for convenience clause did not operate to cut off the town’s rights to assess LDs in this instance, the court explained that there are a number of court decisions holding that a project owner cannot have it both ways – to terminate the contract for its own convenience but to then treat the contractor like it had been terminated for default and assess reprocurement costs and other actual damages that the contractor might have been able to mitigate if it had been given a cure notice as required before default termination. But where, as here, the delay had already occurred and the contractor already owed the LD’s before the contract was terminated, there could be no prejudice or harm to the contractor by terminating it for convenience and not giving it a cure period. There was nothing to correct. The delay had already occurred and the LDs were owed. Therefore, the court declined to apply case law that might have otherwise treated the contractor differently due to the termination for convenience.
Owner Need Not Prove Actual Damages to Recover Liquidated Damages
The court rejected the contractor’s argument that the town could not prevail on its claim for liquidated damages in the absence of a specific finding, or proof, of actual loss. The contractor relied on an earlier court decision that held that “no provision in a contract for the payment of a fixed sum as damages, whether stipulated for as a penalty or as liquidated damages, will be enforced in a case where the courts sees that no damage has been sustained.” But in that earlier decision, the court went on to say, “This is not to say that any burden is placed on a plaintiff to prove actual damage in order to recover under a valid contract for liquidated damages. The proposition is only that equitable principles will be invoked to deny recovery when the facts make it apparent that no damage has been suffered.”
In the present case, the court concluded that the record did not support a finding that “no damage has been suffered” by the town, and, “Moreover, we note that requiring proof of actual damages is in direct tension with the rationale for permitting liquidated damages.”
This decision provides useful guidance on several different legal principles, including:
(1) Obtuse or vaguely worded reservations of rights in change orders to submit a future request for equitable adjustment for time extension are likely insufficient to preserve rights. If a contractor intends to reserve rights to delay it needs to say so, and if the contract has requirements concerning the details of what must be submitted and when it must be submitted, those requirements must be satisfied.
(2) A contract can grant a party certain specific rights such as terminating a contract for convenience but also reserve all rights the party might have had – including the right to assess liquidated damages. In this regard, remedies and damages can be cumulative rather than exclusive. It is important to negotiate the contract to determine what is intended in that regard.
(3) Actual damages need not be proved in order for liquidated damages to be enforced by a court. Indeed, as this court explains, one of the benefits of establishing a liquidated damages provision is that it is used when the parties believe it will be difficult to prove what actual damages are. It is a useful tool and one that is respected by courts.
(4) There is some good dicta in this case suggesting that in the event that it can be proved that there were no actual damage whatsoever resulting from the delay, a court could deny the imposition of LDs since that would in fact look just like a penalty and nothing more.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 17, No. 6 (September 2015).
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