DELAY DAMAGES: SELECTED ISSUES

by Jonathan Sauer

INTRODUCTION

When one materially breaches a contract, then one is liable for the reasonably foreseeable consequential damages flowing from the breach. ‘Reasonably foreseeable’ means that at the time the parties signed the contract, they either contemplated or could have contemplated the elements of what the owner’s damages might be if there is a breach and the job was finished late. For example, if a Wal-Mart is scheduled to open on September 1 but does not open until December 1, it is foreseeable that it is likely to incur actual damages for things such as having to pay payroll (prematurely) for a sales force that isn’t generating any income. Such damage is foreseeable when the parties enter into the general contract.

There are two ways that these damages can be sought.

CONSEQUENTIAL DAMAGES

The first way is to seek actual consequential damages. These become problematic in their identification and proof for a variety of projects. For example, if a police station opens six months late, what are the town’s elements of actual damage? There is no profit potential in such a situation; thus, the town hasn’t lost money due to lost sales. If the existing police station is functional throughout construction, then what has the police department really lost?

LIQUIDATED DAMAGES

An alternative, then, to actual consequential damages is ‘liquidated damages’. This simply means that for every day the contractor is late beyond the specified substantial completion or final completion date, the contractor is to pay a fixed amount per day for each day he is late. This has several advantages. First of all, the owner doesn’t have to actually prove what his consequential damages are. And, the contractor is made aware before he even bids the job as to what his down side might be if he is late. If the author remembers correctly, the liquidated damages for the construction of the sewage facilities at Deer Island were fourteen thousand dollars per day. Only contractors having a reasonable belief that they could absorb such a loss would bid or contract for such work. A company whose principal assets are limited to a pick-up and two magnetic signs wouldn’t bid such a job!

Preliminarily, there is only minimal recent (modern) Massachusetts case authority the author has found in Massachusetts to say that “time is of the essence” in construction contracts only when the contract so provides.

As stated in the case of Resnic v. Toleas, 56 Mass. App. Dec. 54, 60-61 (1975):

“. . . Unless expressly stipulated, time is normally not of the essence in building or other contracts. 6 Williston S846, 849. Here, there was a time stipulated for the completion of the painting but there was nothing indicating that this was essential to the contract. We are of the opinion therefore, because of his general finding and logical inferences that may be drawn therefrom, that by implication the trial justice found that time was not of the essence.”

That case is the exception that proves the rule. As a practical matter, as we all know, “time is money and money is time.” It will be a rare construction contract that does not contain the words “time is of the essence.”

The words “time is of the essence” are frequently tied into the provision for liquidated damages. If you find this phrase in your contract or general conditions, more likely than not, you will find a provision somewhere else in the contract that says there are liquidated damages.

When are liquidated damages (which are damages agreed up-front as to the consequences of a party’s delay) enforceable?

This issue is discussed in the case of A-Z Servicenter, Inc. v. Harry Segall, Trustee, 334 Mass. 672, 675 (1956) by the Supreme Judicial Court:

“Whether a provision of a contract for the payment of a sum upon a breach is rendered unenforceable by reason of its being a penalty depends upon the circumstances of each case. (Cases cited) Where actual damages are difficult to ascertain and where the sum agreed upon by the parties at the time of the execution of the contract represents a reasonable estimate of the actual damages, such a contract will be enforced. (Cases cited) But where the actual damages are easily ascertainable and the stipulated sum is unreasonably and grossly disproportionate to the real damages from a breach, or is unconscionably excessive, the court will award the aggrieved party no more than his actual damages. (Cases cited) The words “liquidated damages and not as a penalty” in the instant note are not decisive. If from the nature of the transaction and the attending circumstances it appears that the contract is a cloak to hide a sum of money out of proportion to and differing greatly from the actual damages ordinarily arising from a breach, then the sum named as in the case at bar is not a penalty. This is true even if it may be designated in the contract as liquidated damages.”

A factor which the Supreme Judicial Court takes into consideration as to whether or not a certain sum represented enforceable liquidated damages is whether or not the disputed provision (on liquidated damages) is: “ . . . negotiated on an arms-length basis between two substantial business firms.” Graves Equipment, Inc. v. M. DeMatteo Construction Co. & another, 397 Mass. 110, 112 (1986). More likely than not, a subcontractor’s or a general contractor’s bidding on a project is probably tantamount to being an ‘arms length negotiation’ because of the fact that if one strongly objects to any particular bid document or general contract provision, one can always not bid. Put another way, the law - whatever that is - is not big on trying to divine subjective intent of parties in entering into a contract after the smoke has cleared. In the vast majority of circumstances, the contract is going to be enforced as written. To do otherwise would only increase fraud and uncertainty in the interpretation of contracts.

THE PROBLEM OF NO DAMAGE FOR DELAY CLAUSES

As to actual damages for delay to be sought by a contractor, one of the important earlier cases discussing this is Charles I. Hosmer, Inc. v. Commonwealth, 302 Mass. 495, 499-503 (1939). In this particular case, the Supreme Judicial Court discussed some of the issues involved with making a delay claim.

As stated on pages 499-500:

“A party to a contract, who is not precluded by its terms from asserting a claim for damages due to delay in commencing or in completing performance, may recover if he can show that the delay was a breach of some express provision of the contract or of an implied obligation imposed upon the other party to the contract not to interrupt or hinder the progress of the first party.”

In the Hosmer case, there was a provision in the contract that, essentially, there would be ‘no damages for delay’ but that the contractor would be entitled to additional time to complete the work.

As stated by the Supreme Judicial Court on page 502: “Such a provision negatives any pecuniary compensation for delay.”

Further, some ideas which might become prophetic in later years (and cases) were discussed by the Court on page 503:

“The petitioner did not introduce any evidence showing the reasons or causes of any of the delays alleged in its petition. The characterization of the action of the Department of Public Works as negligent, unreasonable or due to indecision is not enough to avoid the pertinent provisions of the contract. The respondent or the officials in charge of the work are not charged with arbitrary, capricious or fraudulent action, nor with acting in bad faith or under such a gross mistake as to be tantamount to fraud.”

A more recent case on this issue is the case of Wes-Julian Construction Corporation v. Commonwealth, 351 Mass. 588 (1967).

The contract in question had essentially a “no damage for delay” clause.

The Court stated on page 594:

“In the absence of a specific contract provision to the contrary, the respondent would be bound to refrain from causing delay in the petitioner’s commencement or performance of the contract, and the petitioner could recover for breach of contract for such delays.”

Later, there was some argument by the contractor that the contractor might be entitled to recover for delay damages even in the presence of a no damages for delay clause in the presence of “arbitrary, capricious or fraudulent actions . . . (or action) in bad faith or under such a gross mistake as to be tantamount to fraud.”

The Court stated on pages 596-597:

“Even if we assume that the judge was warranted in finding that the conduct of the respondent was ‘arbitrary and capricious,’ the petitioner is not entitled under this contract to recover damages for delay caused by the respondent in view of the specific provisions of the contract regarding delay.”

In 1990, the Appeals Court “chipped away” at this type of holding. The case in question was the case of Fred J. Findlen v. Winchendon Housing Authority, 28 Mass. App. Ct. 977 (1990).

The construction contract in question had a sweeping provision disclaiming any liability by the owner for job delays. There would be no payment for unavoidable delays, although there would be a time extension.

As stated by the Appeals Court on page 978, “. . . a clause which exculpates the awarding authority from liability for damages arising out of delay is enforceable. (Cases cited) The general rule is subject to an exception if arbitrary and capricious conduct on the part of the awarding authority produces the delay and the authority declines even to extend the time for contract completion.”

In this particular case, although the awarding authority did give time extensions, the authority paid some monies on account of delay and the Court found that this constituted a waiver of the “no delay damages” clause. Moreover, by the authority paying delay damages to the contractor, the awarding authority would have an obligation to indemnify the general contractor for monies it had to pay a subcontractor for delay damages in a separate action.

The rationale for this decision was that, as stated on page 978: “Parties to a written contract may, of course, alter it subsequently, by oral modification, by their joint conduct, or, ideally, by a writing subscribed to by the persons to be bound.”

One of the best cases to be familiar with in this area is the case of Farina Brothers Co., Inc. v. Commonwealth, 357 Mass. 131 (1970), a decision of the Supreme Judicial Court. The Supreme Judicial Court confirmed an auditor’s (another term for a ‘master’, which is a lawyer who acts like a judge in hearing certain cases) finding for the contractor for delay damages against the Commonwealth of Massachusetts. Article 68 of the contract provided that there would be no damages for delay but that the contractor would be entitled to a time extension in the event of delay.

In discussing the testimony, the auditor had found that the contractor was repelled and insulted by the chief construction engineer who blatantly informed him that he did not care about what was happening and would do nothing to carry out the obligations of the department.

Also, there was no time extension given, even though the facts clearly warranted a time extension.

As stated by the Supreme Judicial Court on pages 138-139:

“In circumstances such as here appear, however, the Commonwealth in effect has used the delay provisions to whipsaw the contractor. So employed, they cannot absolve the Commonwealth of liability. If, as may be the case, delay is to occur during performance of the contract the collateral provisions relating to appropriate extensions should come promptly into play. In the present instance their application was unconscionably delayed in a manner to deprive the contractor of such protections as the Blue Book afforded to it. Adherence to these standards by both parties is required. The evidence supports the conclusion that agents of the Commonwealth by intentionally obstructing the application of those standards caused damage to the contractor . . . “

On page 140 of the decision, the Court continued in this vein:

“In sum, we hold that the Commonwealth cannot hide behind the specifications of its contract dealing with delay and, in the circumstances of this case, deny recovery to a contractor who has been put upon to the extent here shown. We have dealt not with the question of damages caused by delay itself which was the main subject of the Wes-Julian case. We have dealt rather with damages caused the contractor by failure to grant seasonable extensions for performance made necessary by delay and failure of the Commonwealth to assist the contractor properly in rescheduling work. It remains only to say that the Commonwealth cannot expect unfailing and honest performance by contractors when it administers its contracts as this one appears to have been administered.”

Thus, it appears that under particularly egregious circumstances, a court might allow a contractor delay damages even in the presence of a ‘no damage for delay’ clause.”

Some other ideas with regard to the issue of delay:

CONCURRENT DELAY

One Massachusetts Court held that a contract defendant (owner) is not entitled to liquidated damages where both plaintiff and defendant are to blame for plaintiff's delayed completion of project. Peabody N.E., Inc. v. Town of Marshfield, 426 Mass. 436, 689 N.E.2d 774 (1998). (ED: This is often referred to as the doctrine of concurrent delay.)

A building contractor, who agreed to complete work before designated date and in default thereof to pay specified sum for each day's delay, was liable, subject only to limitation that owner could not recover damages for delay caused by his acts or of those of persons for whose conduct he is responsible. Wallis v. Inhabitants of Wenham, 204 Mass. 83, 90 N.E. 396 (1910)

In the case of Lafayette Place Associates v. Boston Redevelopment Authority, 427 Mass. 509, 519, 694 N.E.2d 820 (1998), the Supreme Judicial Court stated:

“ "The general rule is that when performance under a contract is concurrent one party cannot put the other in default unless he is ready, able, and willing to perform and has manifested this by some offer of performance." Leigh v. Rule, 331 Mass. 664, 668, 121 N.E.2d 854 (1954). See 6 Corbin, Contracts S 1258 (1962). Any material failure by a plaintiff to put a defendant in breach bars recovery, see Kanavos v. Hancock Bank & Trust Co., 395 Mass. 199, 202-203, 479 N.E.2d 168 (1985). See also Pas-Teur, Inc. v. Energy Sciences, Inc., 11 Mass. App. Ct. 967, 968-969, 417 N.E.2d 487 (1981) (citing cases), unless the plaintiff is excused from tender because the other party has shown that he cannot or will not perform. Leigh v. Rule, supra. Even if a potential buyer notifies the seller of the buyer's intention to tender on a certain date and appears at the registry of deeds on that date with the required consideration, there may not be the "readiness to perform" that is a necessary condition of placing the defendant in breach. See Mayer v. Boston Metro. Airport, Inc., 355 Mass. 344, 350-352, 354-355, 244 N.E.2d 568 (1969).”

THE ENFORCEABILITY OF LIQUIDATED DAMAGE CLAUSES

Here are some decisions from Massachusetts appellate courts on this issue:

. Contractual liquidated damages provision of construction contract were enforceable on the ground that it was a reasonable forecast of damages and where nothing indicated that disputed provision was not negotiated on arms-length basis between two substantial business firms, and where the amount of the liquidated damages, when considered in relation to the total transaction, was not so disproportionate to damages caused to general contractor by material supplier's breach of agreement as to amount to penalty. Graves Equipment, Inc. v. M. DeMatteo Const. Co., 397 Mass. 110, 489 N.E.2d 1010 (1986)

∙ Contract provisions which clearly and reasonably establish liquidated damages should be enforced, if not so disproportionate to losses and expenses caused by defendant's breach as to constitute a penalty. Lynch v. Andrew, 20 Mass.App.Ct. 623, 481 N.E.2d 1383 (1985)

∙ Where contract for removal of traffic control cables and installation of new cables provided that liquidated damages could be deducted for every calendar day that completion of work was delayed, city's right to daily liquidated damages did not terminate when the contractor abandoned the work but were payable until the project reasonably should have been completed. City of Boston v. New England Sales & Mfg. Corp, 386 Mass. 820, 438 N.E.2d 68 (1982)

∙ In regard to situations in which liquidated damages provided for in a default provision are unreasonably and grossly disproportionate to the real damages from a breach, the damages recoverable are limited to actual damages. Begelfer v. Najarian, 381 Mass. 177, 409 N.E.2d 167 (1980)

An unambiguous provision in a contract that certain sum shall be paid in event of its breach by defaulting party to the other, is not a penalty and is enforcible as liquidated damages. Bryce v. MacDougall, 32 Mass.App.Dec. 104, (1965)

∙ Provision of a contract which provides that a certain sum as "Liquidated Damages" shall be paid by one of contracting parties to the other in case the former cancels contract is a penalty and is unenforceable especially where (a) the amount fixed is an unreasonable forecast of the actual damages that probably will be sustained, and (b) where actual damages arising from cancellation can be estimated without great difficulty. Security Safety Corp. v. Kuznicki, 31 Mass.App.Dec. 5 (1965)

∙ Question whether provision of contract for a sum on a breach of the contract is rendered unenforceable by reason of its being a penalty depends on the circumstances of each case.

A-Z Servicenter, Inc. v. Segall, 334 Mass. 672, 138 N.E.2d 266 (1956)

CONCLUSION

As the above cases make clear, the issue as to whether or not a liquidated damages provision will be enforced – or not – depends on issues of fundamental fairness. Is the amount reasonable? If it is, it will likely be enforced. If, on the other hand, the amount is grossly disproportionate to what actual damages might have been capable of being foreseen at the time of the entering into the contract so that the amount really is punitive in nature and constitutes a penalty, they will not be enforceable.

One final note. As a general principle, one can not recover actual damages and liquidated damages. They are generally alternatives and are not generally cumulative.

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This article is not intended to be specific legal advice and should not be taken as such. Rather, it is intended for general educational purposes only. Questions of your rights and obligations under the law are best addressed to legal professionals.

Sauer & Associates sees as part of its mission the providing information and education to the contractors it daily serves, which will hopefully assist them in the conduct of their business. Articles are available on a number of construction subjects (e.g. rights under payment bonds, how to present payment bond claims, the mechanics’ lien law, how to file a demand for direct payment) on this website.

Copyright Jonathan Sauer 2002