When seeking liquidated and actual damages, carefully track time, efforts and costs and avoid duplication.
A County and Contractor contracted for construction of a road and drainage improvement project. The planned project duration was 180 days. The Contractor delayed and defaulted. The Contractor’s surety entered into a takeover agreement with the County to complete the project. The County withheld a portion of the remaining contract balance to cover its estimated actual damages, as is typically proper under performance bonds. The County released the remainder of the subcontract balance to the Contractor’s surety for its usage under the Takeover Agreement. A. Miner Contracting, Inc. v. Toho-Tolani County Improvement District, 233 Ariz. 249, Arizona Court of Appeals, Div. 1, Dept. C (Sept. 19, 2013).
The County recovered liquidated damages and its actual damages. The specifications provided for liquidated damages for each day the work remained incomplete past the deadline “not as a forfeit or penalty but . . . because the actual loss to the [County] and to the public caused by delay in completion will be impractical and extremely difficult to ascertain and determine.”
This is a typical clause and nearly always enforceable. The specifications also provided for recovery of “[a]ll costs and charges incurred by the [County], [and] the cost of completing the work.”
The trial court held that the County could recover liquidated and actual damages because, although both arose because of delays, each was to correct a different damage or injury. The liquidated damages covered the loss of use of the intended finished project.
The actual damages covered the County’s increased costs to deal with the contractor’s default and, separately, the County’s increased costs to complete the project, including engineering, construction administration, maintenance and payments to third parties. The appeals court affirmed the trial court on this point. (The appeals court remanded a waiver issue to the trial court for further determination, but that issue is not germane to this column.)
Regarding the County’s increased costs to deal with the contractor’s default, I have seen it argued that even if greater effort was expended to deal with a difficult or problematic contractor (or subcontractor), such costs are not recoverable if the efforts were expended by fixed-cost assets.
For example, if salaried personnel dealing with problems or difficulties would have been paid regardless of problems arising, then there was no increased cost or damage caused thereby. (This court’s opinion does not indicate if this was argued nor does it focus on this potential issue.)
Any party seeking to recover this type of damage should carefully and separately track all time, efforts and costs when dedicated administration or oversight is provided by otherwise fixed-cost personnel – this will help in later proving damages.
As an aside, in this case, the surety engaged a different contractor for completion of the project. Sometimes, however, a surety may continue to use the defaulted contractor for completion, albeit under the surety’s administration of the takeover agreement. Owners should consider whether they want the right to demand a different completion contractor. Such a right is generally enforceable when expressly stated and not unreasonable.
There are several takeaways here. First, carefully track costs allegedly incurred by fixed assets to help prove damages later. Second, when forming the contract, owners (and higher-tier contractors) should decide if you want the right to reasonably reject the selection of a completion contractor. Third, do not mistakenly conclude that the inclusion of a liquidated damages clause precludes actual damages as both may be recoverable when the damages are not duplicative.
Finally, in the alternative to seeking liquidated and actual damages, include in the liquidated damages amount the reasonably anticipated costs to continue administering the project past the planned deadline together with the reasonable loss of use of the intended project. A liquidated (pre-agreed) amount and withholding lessens the burden on the non-delaying party. RB
