Assessment of Liquidated Damages: Careful What You Bargain For
Liquidated damages are useful tools for parties to allocate risk at the beginning of a contract. A liquidated damages clause allocates the risk of a contract being completed late. For a liquidated damages clause to apply, the damages must be approximately the damages likely to be incurred by the assessing party and the damages must be reasonably uncertain at the time of contracting. While a liquidated damages clause could be used on any type of contract with a deliverable, it is most commonly seen in construction contracts. In that case, for every day the contractor is late in finishing the project, the owner can assess liquidated damages rather than calculating the actual damages on a day-by-day basis.
While the concept seems straightforward (1 day late = $X in damages), assessing liquidated damages can escalate in complexity. In the recent case of American International Contractors, assessing liquidated damages required not one but three project aspects that would impact the project’s completion date. ASBCA Nos. 60948, 61166. In this case, the Army Corps of Engineers contracted with American International Contractors, Inc. (“AICI”) to contract for the “United Kingdom Maritime Component Command (UKMCC) Development, Mina Salman Port, NSA II, Kingdom of Bahrain.” The project provided for the construction of two facilities among other items. The two facilities had to be completed by Mar 7, 2015 and April 6, 2015. Both facilities were completed late with eight days and 28 days of liquidated damages assessed, respectively. After AICI had demobilized from the site, the Army Corps requested a proposal from AICI to perform various work in one of the new facilities. Rather than issuing a new contract, the contracting officer issued a unilateral modification to the construction contract line item for the new facility whereby AICI would perform the new scope in the new facility. In the modification, the contract stated “[t]he Period of Performance has increased … for a period of two-hundred-thirty-two (232) days from the effective date of this modification of March 11, 2016. … This Period of Performance covers work under this modification only, not for the overall contract.”
AICI submitted a claim to the contracting officer claiming that the modification of the Period of Performance under the contract line item for the new facility extended the Period of Performance for the original work as well as the additional work. The ASBCA disagreed with AICI. The ASBCA held that when reading the extension of the Period of Performance language, as a whole, the language extended the Period of Performance only for the additional work, and not for the overall project. Indeed, the ASBCA found persuasive that the contractor had demobilized from the project site before coming back to start the new scope of work, a finding which only reinforced the ASBCA’s conclusions. In sum, because neither party pointed to language specifically saying that the Period of Performance for the original scope of work was extended or had any extrinsic evidence that the original Period of Performance was extended, the ASBCA found that the modification did not extend the period.
The take away from this case is that language still matters. If the contractor had intended to have the liquidated damages eliminated, clearer and specific language was necessary. If the contracting officer intended the liquidated damages to remain, specifically stating that the government would assess liquidated damages for eight and 28 days would have made the contract language clearer. Thus, both parties (but especially the contractor) need to be exact when drafting or agreeing to extensions of time to complete projects so that if a dispute arises later, the parties’ intentions are clear.