The defense of owner-caused or concurrent delay has long been successfully employed by contractors to challenge owner assessments of liquidated damages. The defense of concurrent delay is firmly rooted in principles of causation. When a project would have been independently delayed regardless of the contractor’s delay, the contractor’s delay is not the but-for cause of the owner’s damages. Nevertheless, a string of relatively recent cases threatens to preclude contractors from raising the well-established defense of owner-caused or concurrent delay to challenge owner assessments of liquidated damages. These cases would appear to contravene general principles of causation and permit the owner to reap a windfall by recovering damages from the contractor for delays that are excusable or even compensable.

 

Liquidated Damages Fundamentals

 

Given the complexity of measuring damages arising from delayed construction projects, the widespread inclusion of liquidated damages provisions in construction contracts is unsurprising. These provisions allow the parties to establish a predetermined amount, usually applied at a daily rate, that will be charged against the contractor for failure to complete the project by a certain contractual milestone.

 

Two basic principles of contract law underlie the use of liquidated damages provisions. One is the concept of “freedom of contract,” that parties may freely choose to enter contracts and the terms on which those contracts will operate. This is tempered by the compensatory purpose undergirding breach of contract remedies – to put the non-breaching party in the position it would have been “but for” the breach. Courts have recognized that sophisticated parties may be best situated to consider and agree upon the variety of damages arising from project delays, such as loss of use, lost profits, and increased financing costs. By serving as a substitute for an owner’s actual damages, liquidated damages benefit all parties by providing a straightforward method establishing what delay damages will be and avoiding the time and cost that would otherwise be spent in proving the actual damages. For owners, liquidated damages provisions help ensure proper compensation where entitlement is clear, but proving the various elements of damages with reasonable certainty is unduly burdensome or costly. These beneficial ends, however, are only properly served when liquidated damages are measured in conformity with principles of causation.

 

The Enforceability Of Liquidated Damages Provisions

 

The law is well established that liquidated damages provisions which are designed to be punitive or to compel contractual performance are unenforceable. See, e.g., 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc., 24 N.Y.3d 528, 536 (2014) (citation omitted) (“Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable.”). When evaluating whether a particular liquidated damages provision is enforceable, courts generally consider three factors, including whether:

 

[1] the injury caused by a breach of the contract is difficult or impossible to estimate accurately;

[2] the amount specified in the provision is a reasonable forecast of the probable damage likely to result from the breach; [and]

[3] the parties intended the provision to be compensatory rather than punitive.

 

24 Williston on Contracts § 65:3 (4th ed.).

 

Liquidated damages provisions are certainly intended to simplify the process of proving difficult to establish damages. However, causation remains “an essential element of damages in a breach of contract action.” Nat’l Mkt. Share, Inc. v. Sterling Nat. Bank, 392 F.3d 520, 525 (2d Cir. 2004). Far from ignoring causation, considerations governing the enforceability of a liquidated damages provision are rooted in such principles. Indeed, each of the three factors which courts generally consider when evaluating the enforceability of a liquidated damages provision has some connection to causation.

 

The requirement that liquidated damages be compensatory rather than punitive requires that the liquidated damages provision at issue be qualitatively linked to causation. If the liquidated damages agreed upon by the parties have no connection to the damages likely to be caused by a breach, such a provision is punitive rather than compensatory. Similarly, the requirement that liquidated damages constitute a reasonable pre-estimate of probable loss mandates a quantitative link to causation. As noted by the Restatement (Second) of Contracts § 356 (1981) (emphasis added), “[d]amages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach ….” Finally, the requirement that the actual damages for which stipulated damages are substituted must be difficult to estimate recognizes that liquidated damages are inappropriate where they are almost certain to diverge from the amount of damages actually caused by the breach.

 

Appreciating the nexus between causation and the enforceability of liquidated damages is essential to any meaningful evaluation of the enforceability of a liquidated damages provision. Similarly, principles of causation cannot be ignored when evaluating the apportionment of delay for purposes of assessing liquidated damages in the construction context.

 

The Advancement Of Scheduling Technology And The Evolution Of The Law Of Delay Apportionment

 

The ability to analyze the root-cause of project delay has steadily improved with the advancement of project scheduling technologies. The successful use of Gantt charts on the Hoover Dam project in the 1930s, the development of critical path method (“CPM”) in the 1950s, and the launch of computerized scheduling software such as Primavera in the 1980s each represented a significant step forward in the construction industry’s ability to analyze the root-cause of project delay. The evolution of the law regarding the apportionment of liquidated damages has generally tracked the increasing sophistication of scheduling technology.

 

Courts initially dealt with the relative lack of sophistication when apportioning responsibility for concurrent delay in the context of liquidated damages by applying the Rule Against Apportionment. Under this rule, “‘[w]here delays are caused by both parties to the contract the court will not attempt to apportion them, but will simply hold that the provisions of the contract with reference to liquidated damages will be annulled.’” Acme Process Equip. Co. v. United States, 347 F.2d 509, 515 (Ct. Cl. 1965), rev’d on other grounds, 385 U.S. 138 (1966) (citations omitted). The reluctance of courts during this time period to apportion project delays was justified given the limitations of scheduling technology. Without a means of easily assuring that a party would not be charged with damages that it did not cause, the Rule Against Apportionment represented a safe approach to the assessment of liquidated damages.

 

The widespread adoption of computerized CPM scheduling software in the 1980s revolutionized delay analysis.   The improved ability to determine the root cause of project delay made the Rule Against Apportionment appear “harsh and outdated.” PCL Constr. Servs., Inc. v. United States, 53 Fed. Cl. 479, 485 (2002). Consequently, courts began to embrace a new approach – the Rule of Clear Apportionment. Under the Rule of Clear Apportionment, courts will permit the assessment of liquidated damages, even where there is both contractor and owner-caused delay, “when there ‘is in the proof a clear apportionment of the delay and the expense attributable to each party.’” Id. at 487 (citing Sauer Inc. v. Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) (citation omitted)). This shift in approach and increased willingness to engage complex scheduling issues was made possible by CPM scheduling software. CPM scheduling software permitted courts, aided by expert testimony, to award liquidated damages with reasonable certainty that such awards provided compensation for damages actually caused by the contractor.

 

Although the enforceability of liquidated damages is determined by state law, the Rule of Clear Apportionment currently reflects the majority approach applied across the United States in connection with the apportionment of delay. See Hutton Contracting Co. v. City of Coffeyville, 487 F.3d 772, 785 (10th Cir. 2007).

 

The Emerging “Rule”

 

Despite the widespread acceptance of the Rule of Clear Apportionment, a handful of courts may be adopting an emerging “rule” in connection with the apportionment of project delay for purposes of awarding liquidated damages. In recent years, sophisticated owners have increasingly deployed procedural arguments to limit a contractor’s ability to raise the defense of concurrent delay when opposing assessments of liquidated damages. Many of these contractual provisions (such as notice and claim submission requirements) being utilized to bar the defense of owner-caused delay were originally intended to provide owners with the opportunity to mitigate damages associated with affirmative contractor delay claims. However, a series of recent court decisions have sided with owners and enforced such contractual provisions to preclude contractors from relying on the defense of owner-caused or concurrent delay when opposing assessments of liquidated damages. Under this emerging “rule,” owners may recover liquidated damages, including amounts for owner-caused delays, where contractors fail to follow procedural provisions to preserve their defenses. Precluding any consideration of owner-caused delay would appear to represent a dramatic departure from the focus on causation found in both the traditional Rule Against Apportionment and the modern Rule of Clear Apportionment.

 

The decision in Greg Opinski Constr., Inc. v. City of Oakdale, 199 Cal. App. 4th 1107 (Ct. App. 2011) illustrates the application of the emerging “rule.” In Opinski, the contractor entered into an agreement with the City of Oakdale for the construction of a municipal project. The contract provided that the contractor could only obtain an extension of time by obtaining a change order through the procedure specified in the contract. The contract also provided that the contractor was entitled to an extension of time for delays caused by “circumstances beyond the control of the contractor.” In the event the contractor and owner were unable to agree upon a change order, the contractor could only obtain an extension of time by submitting a written claim for a time extension to the project engineer. The contractor encountered delays on the project but failed to obtain a change order or submit a written claim for an extension of time as required by the contract. The city ultimately assessed liquidated damages against the contractor. At trial, the contractor argued that “its timely performance was impossible because of . . . city-caused delays.” Nevertheless, the trial court found that where the contractor failed to follow the contract’s procedure for obtaining a time extension, the cause of the delays was irrelevant for purposes of assessing liquidated damages. The California Court of Appeals affirmed the trial court’s decision, finding that:

 

If the contractor wished to claim it needed an extension of time because of delays caused by the city, the contractor was required to obtain a written change order by mutual consent or submit a claim in writing requesting a formal decision by the engineer. It did neither. The court was correct to rely on its failure and enforce the terms of the contract. It makes no difference whether Opinski’s timely performance was possible or impossible under these circumstances.

 

Id. at 1117-18. The Opinski court appeared to rely heavily on a recent, corrective statutory amendment that it believed required strict compliance with the contract’s procedural requirements in order to raise the issue of owner interference. Statutory nuance alone, however, does not explain the outcome reached by the California Court of Appeals in Opinski.

 

Courts in Alabama, Ohio, and Michigan have reached similar results. See Cove Creek Development Corp. v. APAC-Alabama, Inc., 588 So. 2d 458, 459 (Ala. 1991); Dugan & Meyers Constr. Co. v. Ohio Dep’t of Adm. Servs., 864 N.E.2d 68, 74 (Ohio 2009); Abhe & Svboda, Inc. v. State, Department of Transportation, 2017 WL 3722001 (Mich. Ct. App. 2017), appeal denied 501 Mich. 983 (Mich. 2018) (unpublished). The outcomes reached in these cases represent a new challenge to a contractor’s ability to rely on the defenses of owner-caused or concurrent delay to oppose the assessment of liquidated damages.

 

Part II of this article, which will appear in Watt Tieder’s Fall 2019 Newsletter, will address legal challenges to the emerging “rule” as well as takeaways for construction professionals.