District Court for District of Columbia declares liquidated damages clause unenforceable.

Kingston Constructors, Inc. v. Washington Metropolitan Area Transit Auhority,
1996 U.S. Dist. LEXIS 8427 (D.D.C. June 6, 1996)

Corps of Engineers Board of Contract Appeals erred in reducing amount of contractual liquidated damages from $1000 to $500 per day; Board should have declared provision unenforceable and awarded actual damages. 

The defendant Washington Metropolitan Area Transit Authority (“WMATA”) contracted with plaintiff Kingston Contractors, Inc. (“Kingston”) to remove and destroy existing electrical transformers in WMATA’s rapid transit rail system, and procure and install replacement transformers. The contract contained a liquidated damages provision which provided for $1000 for each calendar day of delay beyond a specified completion date.

Kingston subcontracted the manufacturing of the transformers to Power Energy Industries (“PEI”). Contractually required pre-installation testing of the manufactured units revealed that they contained misplaced insulation which caused a short circuit defect. In addition, when the first unit was installed, it functioned for only a few minutes before failing and releasing a cloud of smoke.

In an attempt to assure that the transformers would still be capable of performing as required, the parties then subjected the transformers to additional tests, beyond those required in the contract. Six out of 11 transformers failed these tests. WMATA also rejected another solution proposed by Kingston, because WMATA thought that the proposed solution might compromise the structural integrity of the transformers and shorten their useful lives.

When two transformers failed another round of tests, WMATA rejected the entire lot of 22 transformers that had already been manufactured, stating that it had completely lost confidence in the ability of the PEI transformers to function as required. Kingston was forced to reprocure the transformers, at substantial additional cost. Also because of the reprocurement, Kingston was unable to finish on time and, as a result, incurred liquidated damages costs.

Kingston asked the Board to grant it a time extension and an equitable adjustment in the amount of the contract. The Board granted an equitable adjustment for costs and delays associated with the additional extra-contractual testing, and reduced the amount of liquidated damages from $1000 per day to $500 per day. Kingston then appealed to the district court, challenging, inter alia, the Board’s decision to reduce the liquidated damages. Kingston claimed that the Board’s only alternative was to declare the clause unenforceable.

The Board had found that, in determining the $1000 liquidated damages figure, WMATA had included a $500 contingency for the possible assessment of Environmental Protection Agency penalties associated with the work, even though WMATA already knew that the EPA was not going to assess such penalties. Citing the general rule that a liquidated damages provision which is an unreasonable approximation of damages must be stricken as an unenforceable penalty, the district court agreed with Kingston that WMATA had acted unreasonably in setting the liquidated damages amount, and that the Board had erred in reducing the liquidated damages amount rather than striking the clause altogether.

The court disagreed, however, with Kingston’s assertion that striking the damages clause was the only course of action open to the Board. Rather, the court held that actual damages should be awarded instead of liquidated damages, and it remanded the case for a determination of the amount of such damages. The case may have been a Pyrrhic victory for Kingston, since WMATA claimed that its actual damages were more than $1000 per day.

In other sections of the opinion, the District Court upheld the Board’s findings of fact that the transformers had more than one defect and that they had an “excessive” number of test failures, and affirmed the Board’s conclusion that WMATA had not committed “economic waste” by rejecting the transformers instead of accepting the proposed repair solution.

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