LEGAL BY GERARD W. ITTIG
In construction contracts, it is common for an owner to insert a clause
requiring payment of a fixed amount
per day for delays. Generally speaking,
these LD clauses are legal and enforceable, with some limitations. Problems
arise when courts are asked to interpret
an LD clause, particularly where there
are other clauses concerning damages
in the contract.
For example, an LD amount for
delays must be based on an owner’s reasonable projection of what its monetary
damages may be if the job runs late.
This projection may include such items
as extended rental costs of an owner’s
current location while it waits to move
into the new building you are constructing. Also, the owner may want its LDs
to cover extended insurance costs, site
security, an architect’s supervision billings, etc. As such, the LDs are not viewed
as a penalty but as compensation of a sort.
There are cases where an LD clause
was held not to apply to all types of
delays, allowing the owner to seek
recovery of its actual damages because
another contract clause seems to conflict with it.
One such case arose out of steel
deliveries, but the decision could be
applied equally to electrical equipment,
conduit and wire.
In Merrill Iron & Steel Inc. v. Blaine
Construction (W.D. Pa. 2016), it was
determined that some of the steel sent
to the job by Merrill did not meet tolerances. While this issue was being
addressed and fixes proposed, the job
began to run late. In court, Blaine sought
to recover two types of damages: 1) the
cost of repairing/replacing some of the
steel and 2) delay damages incurred
during the repair/replace process.
Merrill argued that all delay-related
damages were covered by the LD clause
and therefore Blaine’s larger actual damages should not be considered. Note that
the contract put a cap of $150,000 on LDs
and the repair/replace efforts took so long
that actual delay damages continued to
accumulate and ended up being far more
Blaine argued that the LD clause
only applied to delayed completion,
a pure time calculation, not to delays
caused by defective deliveries. In other
words, only late deliveries were cov-
ered by the LDs. Standing by itself, this
argument seems strained. However,
the contract also had a clause labeled
“Approval of Goods” that changed the
court’s focus. That clause stated that
Merrill was liable “for all additional
costs in performance as a result of
defective or nonconforming goods.”
These two clauses were conflicting with regard to defective deliveries:
One provided for LDs for any delays;
the other one provided for “all additional costs” for defective deliveries.
This conflict caught Merrill off guard.
In fact, prior to contract signing, Merrill had specifically demanded that the
LD clause be modified by placing the
$150,000 cap on its exposure. It did not
catch the implications of the “Approval
of Goods” clause.
The court ruled in favor of Blaine that
the LD cap did not apply. Underlying this
decision is a principle of contract law
that courts are to interpret contracts so
that the various provisions can be read
together and reconciled, i.e., to avoid
what may initially appear to be conflicts
between the terms and conditions. Using
this principle as a starting point, the
court stated that the “all costs” language
for defective goods was independent of
the LD clause.
There were ways in which the original contract between Blaine and Merrill
could have been modified to avoid this
unexpected result, but this case highlights a basic problem with construction
contracts generally. Contractors are the
ones who review them and agree to
their terms, but the interpretation and
meaning of these agreements are made
by judges, and they live by very different
rules than contractors do.
When Liquidated Damages
The intricacies of LD agreements
CREDIT CARDS TYPICALLY APPLY INTEREST TO LATE PAYMENTS. This
interest factor, which may be 18 percent or more, can be viewed as a form of liquidated damages (LDs). The base amount owed is not liquidated, because it depends
on your balance, but the percentage is liquidated, or fixed, by agreement. Similarly,
utility bills might have a provision for a bump-up in what must be paid after a
certain number of days following the invoice date. We have grown to accept these
penalties as the norm. In both of these instances, the amount is supposed to compensate the payee for what might be its “actual” damages.
I T TI G, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be
contacted at 202.387.5508,