Two contract provisions that are frequently litigated in construction disputes are no-damages-for-delay and liquidated damages clauses. A no-damages-for-delay clause typically provides that if there is a delay caused by the owner or others, the contractor will not be entitled to any additional compensation for that delay. It is a clause that project owners love because it limits their liability for delays on the project.
Similarly, a liquidated damages clause is an owner-preferred contract provision that usually sets a fixed amount for which the contractor is liable to the owner if the project is not finished on time. Often, the amount is set as a certain sum of money per day the project is late (e.g., $1,000 per day). The Florida Second District Court of Appeal recently addressed both those provisions in an opinion it issued in January 2022.
In Sarasota County v. Southern Underground Industries, Inc., Sarasota County awarded a contractor a contract to install a sanitary force main pipe and a water transmission line underneath an intracoastal waterway. During construction, the county issued a stop-work order because a homeowner adjacent to the project complained that the construction was causing vibration that damaged his home. Ultimately, a structural engineer examined the home and found that the damage was cosmetic and essentially concluded that the contractor had done enough to prevent future damage. The contractor also got an insurance policy to cover any homeowners’ claims for damage to their property from construction of the project.
Despite the engineer’s report providing that construction could continue, the county refused to withdraw its stop-work order. The suspension of the work appears to have continued for another 71 days while the county continued to negotiate with the homeowner. Once the suspension was lifted, the contractor submitted a timely claim to the county for the expenses it incurred during the 71 days the project was suspended. The county rejected the claim, and the contractor sued the county for breach of contract.
After having a bench trial, the trial court concluded that the county breached the contract by refusing to compensate the contractor for the 71-day delay. The trial court awarded the contractor about $640,000, but the trial court also awarded the county $177,750 in liquidated damages because the project achieved final acceptance 771 days after the date specified in the contract.
On appeal, the county argued that the trial court should not have awarded the contractor $640,000 in delay damages because the contract contained a no-damages-for-delay clause. The court noted that although no-damages-for-delay clauses are generally enforceable in Florida, they will not be enforced in the face of “active interference” by the owner. The court agreed that the evidence supported the trial court’s finding that the county “impeded work on the project, at [the contractor]’s expense, long after it was determined that it was safe to proceed with minimal damage to the adjacent homes.” As such, the no-damages-for-delay clause did not bar the contractor’s delay claim.
The court also held that sovereign immunity did not preclude the award of delay damages to the contractor. The court reasoned that sovereign immunity did not bar the contractor’s claim because the claim was for “work performed to achieve the contract result.” Thus, the court held that the contractor was entitled to additional compensation for the time and expense caused by the county’s unjustified suspension of the work.
As to the liquidated damages, the court reversed that part of the trial court’s decision because the liquidated damages provision was unenforceable in the context of the parties’ dispute. In particular, the court held that the liquidated damages clause was unenforceable because the sum stipulated to be awarded was “grossly disproportionate” to any damages that might be expected to flow from the contractor’s breach. Since the county had full use of the completed construction project for two years before final acceptance, the county failed to show that it suffered any loss from the delay of final acceptance of the project. As such, the court concluded that the county was not entitled to any liquidated damages, and affirmed the award of delay damages to the contractor.
Bottom Line: One way for a contractor to get around a no-damages-for-delay clause is by showing that the project owner actively interfered with the contractor’s ability to timely complete the project. While that can be a difficult thing to prove, it is possible where the owner continues to suspend any performance by the contractor on a project, which is what happened in the Southern Underground case.
Also, while liquidated damages clauses are generally enforceable, the damages awarded to an owner for delay under such a clause cannot be grossly disproportionate to the actual damages an owner suffers due to the late completion of the project. That can usually be difficult to prove as well, but where it can be shown that an owner did not suffer any damages due to the untimely completion of a project, courts are more likely to find the liquidated damages provision unenforceable.
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[Update – August 4, 2022: Here is another post discussing a court’s decision to strike a liquidated damages clause as unenforceable.]