Hard Hat Case Notes

• Author: By Christopher M. Burke and Lauren P. McLaughlin
• Pages: 41-44

THE CONSTRUCTION LAWYER 41Volume 42 Issue 2 2022

HARD HAT CASE NOTES

Board Refuses to Enforce

Owner’s Liquidated Damages

Rate as Unreasonable

Because liquidated damages (LD)

clauses are so common in con-

struction contracts, many assume

that if contract parties agree to

the assessment and amount of

the LDs, the LD clause must be

enforceable. The longstanding

principle of LDs is that they must bear a reasonable rela-

tionship to the actual damages expected to be incurred by

the party that will collect them. Stated differently, if an owner

has the right to recover LDs for the late performance of a

contractor, the owner must demonstrate that the calcula-

tion of the LDs in the contract reasonably correlates to the

cost the owner expects to incur from not having the facility

available to it by the specied contract date.

Most of the reported case law on delayed LDs address

disputes over excusable delays, such as whether the contrac-

tor was entitled to a time extension that would mitigate some

or all of the delay days for which the LD amount would

apply. However, Appeal of Sauer Incorporated addresses the

validity of the LD formula and amount.

In Sauer, the U.S. Army Corps of Engineers (COE)

awarded a $33 million design-build task order to Sauer

Incorporated (Sauer) for work associated with the con-

struction of the new 82nd Airborne Division Headquarters

(HQ) building in Fort Bragg, North Carolina. The task order

divided the work into three phases: (i) construction of the

new HQ building (Phase I); (ii) furniture installation and

move into the new HQ building from the existing one (Phase

II); and (iii) demolition of the existing HQ building and

construction of a parking lot for the new building (Phase

III). Each phase had a specic duration by which it was to

be completed and the overall project was to be completed

in 700 days. The task order specied a daily rate of LDs in

the amount of $4,365.81 per day if the overall project was

not completed on time.

Sauer timely nished both Phases I and II but was 33

days late in nishing Phase III. The COE assessed LDs

against Sauer for that delay in the amount of approximately

$144,000. Sauer argued that the assessment of damages was

inappropriate because the COE had benecial occupancy

of the new HQ building four months before the contract’s

completion date. Sauer noted that the work associated with

the new HQ building (i.e., Phase I) represented 98.7% of the

total construction-related costs, and that both Phase II and

Phase III only had minor work that did not affect benecial

occupancy. The COE rejected Sauer’s position largely on

the grounds that the LD provision was tied to completion

of all three phases, and not just Phase I. Sauer appealed the

COE’s decision to the Armed Services Board of Contract

Appeals (Board).

In the litigation, Sauer led a motion for summary judg-

ment arguing that there were no material facts in dispute

concerning its position that the COE was not entitled to

LDs. In a rather lengthy and well-reasoned decision, the

Board largely agreed with Sauer’s position. As an initial

matter, the Board stated the principle that it is improper for

the federal government to assess LDs after the date of sub-

stantial completion, and that the government had the burden

of not only establishing the date of substantial completion,

but also whether the period of time for which the govern-

ment-assessed LDs was correct. The Board noted that the

terms “substantial completion” and “benecial occupancy”

are used interchangeably, and that “benecial occupancy” is

associated with the owner using a facility prior to the com-

pletion of the contract.

Against this backdrop, the rst question the Board evalu-

ated was whether Sauer had belatedly achieved substantial

completion so as to justify LDs. In deciding this question,

the Board noted that the COE’s original request for propos-

als (RFP) did not divide the project into phases, but instead

had a single completion date for all of the work. The RFP

was eventually revised to create the three phases. In the liti-

gation, the COE argued that by doing so, “the parties agreed

that each phase would have functionally equivalent impor-

tance regarding performance” and that it was appropriate

to have LDs tied to completion of the entire project.

The Board rejected this argument. The Board found that

simply dividing a contract into phases, without more, did not

establish the functional equivalence or importance of each

phase. Per the Board, the COE offered “no evidence support-

ing a nding that completion of Phase III was functionally

equivalent to completion of Phase I or, for that matter, Phase

II.” The Board stated:

Other than its bare allegation that the existence of a

phased contract establishes the singular import of each

phase, the government offers no evidence that strict com-

pliance to completion of all three phases truly was “essential.”

The Task Order provisions cited by the government do not

speak to the parties’ expectations regarding the owner’s rea-

sonable use of the facility, or whether the Project was capable

of adequately serving its intended purpose at the time the

government claimed the right to assess liquidated damages.

Based on this, the Board concluded that both Phases I

and II were substantially completed on time, and not subject

to LDs. The Board was unable to make a summary judgment

determination on whether Phase III was substantially com-

pleted on time and concluded that more facts were needed

to determine that question.

The Board turned to the potential assessment of LDs

considering that the COE had only established one daily rate

for the entire project, as opposed to individual LD amounts

for each phase, as would normally be expected. The COE

argued that the full $4,365.81 daily rate was appropriate,

and Sauer argued that this rate was unreasonable relative

Hugh D. Brown

By Hugh D. Brown and Lauren McLaughlin