General Contractor Assessed Significant Delay Damages Following Termination for Convenience

Construction and Procurement Law News, Q3 2015

Client Alert

Perhaps the most common advice that Bradley Arant provides to clients is the need for an extensive review and understanding of the proposed terms of the contract (preferably by legal counsel) prior to signing. This is because once the contract is executed, the ability to limit and shift risk is effectively lost. In a second case from Connecticut, Old Colony Construction, LLC v. Town of Southington, the Connecticut Supreme Court confirms that the plain language of the parties’ signed contract will be strictly enforced as written, even when the terms of the agreement may contravene common construction industry practice pertaining to the assessment of liquidated damages following termination.

In Old Colony, the general contractor entered into a $912,500 contract with the Town of Southington, Connecticut (“Town”) for demolition work and the subsequent construction of a wet well, pumping station and above-grade garage. The Town’s general conditions expressly stated that time was of the essence with respect to the contractor’s performance under the contract, and provided for liquidated damages of $400 for each day of delay past the designated date of substantial completion. The conditions further contained a detailed process for requesting change orders and a broad general reservation of rights in the event of a termination for convenience by the Town: [the Town] “may, without cause and without prejudice to any other right or remedy of [the Town], elect to terminate the [c]ontract…”. (emphasis added).

The contractor commenced work on the project, but there were repeated delays caused both by the general contractor’s performance and inaccuracies with the Town’s construction documents. The Town later terminated the contractor’s right to proceed for convenience after previously threatening termination for cause on several occasions and repeatedly advising that liquidated damages would be assessed from the repeated delays. The contractor did not strictly comply with the contract’s notice provisions for requesting additional time under the contract. The contractor sued for damages arising from the termination for convenience, and the Town asserted a setoff counterclaim for liquidated damages for the 789 days between the agreed upon substantial completion date and the date of the termination. Following a bench trial, the court found that the contractor was entitled to recover damages in the amount of $164,440.64 arising from the termination, but further ruled that the liquidated damages provision was fully enforceable at $400 per day. Because the liquidated damages assessed for the delay totaled $315,000.00, judgment was entered in favor of the Town in the amount of $150,559.36.

On appeal, the Supreme Court of Connecticut agreed with the trial court and affirmed the judgment in favor of the Town. Specifically, the Supreme Court found that the termination for convenience provision broadly reserved the Town’s right to terminate “without prejudice to any other right or remedy,” including the Town’s ability to assess liquidated damages. The Court reasoned that the contract must be interpreted as signed, and that the parties could have agreed to limit the scope of this provision or inserted restrictive language elsewhere in the agreement. Moreover, the Court found that the Town’s comparative fault for the 789 day delay was irrelevant, because the contractor failed to comply with the contractual notice mechanism to reduce the damages for delay that were not attributable to the contractor.

Like ECT discussed above, the Old Colony case is important because liquidated damages, while frequently assessed in terminations for cause, are rarely assessed when a party’s right to proceed has been terminated for convenience. The Supreme Court of Connecticut did not directly address this common construction industry practice and instead strictly enforced the language of the parties’ agreed-upon contract, even when the Town was partially at fault for the very delays for which it was seeking to recover. Old Colony confirms the point that public contracts usually do not allow the contractor to negotiate the contract language. Hence, do not bid, or resolve, if the low bidder, to adopt practices to make certain the performance team follows the contract requirements. Sound administration may mean the difference between a $164,440.64 recovery as opposed to a $150,559.36 liability.