Hard Hat Case Notes

AuthorBy Christopher M. Burke and Lauren P. McLaughlin
THE CONSTRUCTION LAWYER 41Volume 42 Issue 2 2022
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

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