ConstructionPro Week, Volume: 1 - Issue: 32 - 12/14/2012

Is the Withholding of Liquidated Damages a ‘Claim?’

By Bruce Jervis

 

A recent ruling by a Tennessee court should give project owners heartburn. The Tennessee Court of Appeals ruled that an owner’s withholding of liquidated damages was a “claim” within the meaning of the AIA general conditions. The owner was required to give formal written notice of claim within 21 days after the contractual completion deadline passed. Failure to do so waived the owner’s right to $237,000 in liquidated damages.

 

The Tennessee court rejected the project owner’s contention that the withholding was automatic and self-executing, authorized in advance under the express terms of the contract. And the withholding was more than a mere calculation of how much was due upon the next payment. The withholding was a “claim,” subject to the claim procedures of the contract.

 

Project owners routinely threaten to assess liquidated damages, prodding contractors toward timely completion. But how many owners give formal notice of entitlement to liquidated damages once the deadline passes? Probably very few. Should project owners always consider a liquidated damage withholding a claim? That depends on the contract’s definition. The Tennessee court noted that the Federal Acquisition Regulation defines claim in a manner which differs considerably from the AIA definition.


What is your opinion on this ruling? It appears to be only the second reported appellate opinion from any court to arrive at this conclusion. It would be premature to consider it black letter law. If it becomes a trend, however, it would add a new wrinkle to project administration from the owner’s standpoint. I welcome your comments.

 

COMMENTS

This is a really surprising ruling. It just shows why it's often advantageous to submit construction disputes to binding arbitration in front of arbitrators with construction experience, rather than judges.
Posted by: Rob Pitkin - Friday, December 14, 2012 10:15 AM


The whole subject of liquidated damages should be the question. In this age of micromanagement construction managers, the architect & engineer & commissioning authorities all add their opinions & observations into the mix of a project usually adding great amounts of time. So if you have a 1-year project and RFI, change orders and the submittal process from everyone above the GC takes 4-6 months to process & get back to you so you can proceed with your work is it fair to charge the GC liquidated damages when the project takes 14-months to complete? There are a lot of factors besides just the GC & his forces that add time to a project and waiting on answers and approvals is a huge part of it. So again I ask is it fair to charge the GC for delays that the others above them have a hand in. I don’t know about the project talked about in this article, but most of the projects I’ve been working on experience extremely slow turnaround times for responses on project issues which in the end wreaks havoc on the project schedule.
Posted by: Contractor - Friday, December 14, 2012 10:51 AM


Based on my reading of facts in the article, it would seem that the notice of claim was tied to the contract completion date (as-adjusted). The contract date is not equivalent to an event causing a claim. Most likely, the delay that resulted in the contractor not completing on time ocurred before the contract completion date. The additional time after the contract date is not the delay but rather the consequence of a previously occurring delay. This ruling simply does not make any sense at all.
Posted by: James Hamje, P.E. - Friday, December 14, 2012 11:24 AM


It is a concern that the owner cannot reserve the right to make a claim unless they have submitted that claim within 21 days. Often times, when a GC has not finished by the completion of the contract, the GC doesn't know how much longer it will take them even with a delay schedule because of either punchlist activities or if they are waiting for a Change Order to be fully approved (provided that LDs assessed by final completion, not substantial). If the delay is only a few thousand or so because of a few days delay, and the contractor has not even made an effort to request a time extension, it doesnt make sence to withold LDs because the cost of pursuing the claim by hiring lawyers and all of the court fees will be larger than the LDs witheld.

@ Pitkin, I'd like the arbitration comment. Tha would be a more efficient and cost effective approach.

@ Contractor. Typically, the GC has the right to request a time extenstion to the contract if there is a delay not caused by the GC. This is considered an excusable delay and a time extension can be requested given the contractor has taken every feasible approach to recover the delay, given the owner acknowleged that longer weekday hours and weekends are going to be worked.
Posted by: Owners Rep - Scheduler - Friday, December 14, 2012 1:19 PM


I had this same issue in a case I was handling for a client in Virginia where I took the position that the owner's assessment of LD's was a claim barred by the 21 day notice requirement. The matter was settled, however, so the court never ruled on the issue.
Posted by: Jack Rephan - Friday, December 14, 2012 1:23 PM


The owner's rep should have never allowed this issue to percolate like this. Should have been discussed in the weekly work meetings and escalated to senior execs at firms involved.
Posted by: david bentley - Friday, December 14, 2012 1:28 PM


Too often LDs are simply thinly veiled punitive incentives to finish. If actual damages were actually being incurred, it seems the owner would have been intimately aware of the costs of delay, aware of contract language and the schedule and responsive in notifying the GC of an intent to enforce this element of the contract. The contract language appears to be protection for the GC against punitive contrivances after the fact. It is hard to find fault with the judge's determination without knowing more about the case and why the contract treats LDs as an option/claim rather than an automatic condition of the agreement.
Posted by: mdwilson - Friday, December 14, 2012 7:06 PM


Assessment of LDs is agreed by both parties at the commencement of the contract and are based on specific milestone dates that are to be achived by the contractor and his subcontractors. Delays occur on most projects and as noted above, the Owner grants an excusable delay, this too is the Owner granting relief and assessment of LDs against the Contractor that were previously agreed too. The Court erred in that the Owner had essentially given Notice to the contractor (but without the particularities) when the Owner entered into the contract and the contractor agreed to the Owner's terms if it should be late in achieving designated milestone dates laid out in the contract. The contract date is not equivalent to an event causing a claim. As Mr. Hamje noted above, "Most likely, the delay that resulted in the contractor not completing on time ocurred before the contract completion date. The additional time after the contract date is not the delay but rather the consequence of a previously occurring delay." The Contractor by signing the contract already was on Notice of any penalties it could be assessed if it did not achieve the (as adjusted)Completion Date.

By making this decision one noe has to question what is the purpose of assessing any LDs and if I were an Owner I might consider a means of calculating heavier damages when a contractor fails to perform. This ruling could signifcantly impact Contractors, subcontractors and vendors too as they could be assessed actual damages of the Owner in the future which are historically higher than actual agreed LD per diem penalties.
Posted by: C. J. Mather - Sunday, December 16, 2012 6:45 AM


Most issues related to LD are best solved by arbitration as there is enough blame to go around. Consultants delay issue of information, Clients delay payments. Contractors RFI's are not timely and so on. I have found very few construction processes where 100% fault can be placed at one party. And yes courts with their limited appreciation of the construction process and its documentation
Posted by: Andrew Wahome - Monday, December 17, 2012 11:16 AM


Recently had an Owner's PM not allow Change Orders including time during the project and stated they would address these at the end. As you can understand with a project that had unknown or hidded issues - the decision process (as stated by others) by the owner were time consuming - months in some cases that were tacked on as liquidated damages to the firm. Their mgmt even disallowed approved changes (by the PM) in time. The PM even went on a 10 day vacation with plans to be reviewed and approved in his office - but would not allow an extension for any review time. In this case it appears to be a means (an SOP) to reduce the overcost of the project by falsely back charging liquidated damages against the GC. There were no written notices during the project all - quite the opposite in that time was not an issue but correcting the problems was more important. Be careful out there - stop the project and work cost and time extensions out.
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