Tenth Circuit Holds Supplier Delay Does Not Excuse Contractor Delay Under Force Majeure Clause; Holds Liquidated Damages Provision Allows For Apportionment Of Damages Where Owner Responsible for Some Delays

Hutton Contacting Company, Inc. v. City of Coffeyville
2007 U.S. App. LEXIS 9914, (10th Cir., April 30, 2007)

Contractor contracted to construct power and fiber-optic lines for the City. Upon completion of the project, the City refused to pay the final balance of the contract price, claiming that it was entitled to the funds as liquidated damages because the project was not completed on time. The Contractor sued to obtain the unpaid contract balance. The trial court ordered the City to pay the Contractor the retainage due minus $85,000 in liquidated damages. On appeal, the United States Court of Appeals for the Tenth Circuit, applying Kansas law, considered: 1) whether the contract’s force-majeure clause excused the Contractor for delays caused by late deliveries from its pole supplier; 2) whether the contract’s liquidated-damages provision was enforceable; and 3) whether the contract’s liquidated damages provision allowed the District Court to apportion delays between the Contractor and the City.

The Contractor asserted that the delay to the project was excused, relying on the contract’s force-majeure clause. The force-majeure clause stated:

“The time for Completion of Construction shall be extended for the period of any reasonable delay which is due exclusively to causes beyond the control and without the fault of [the Contractor], including Acts of God, fires, floods, and acts or omissions of [the City] with respect to matters for which [the City] is solely responsible.”

The Contractor asserted that any delay resulting from the supplier’s late delivery of poles was excusable where it was “beyond the control and without the fault of [the Contractor].” The District Court rejected the argument on the ground that the Contractor could be charged with fault in selecting its supplier. On appeal, the Circuit Court affirmed the District Court’s conclusion, holding that the “most reasonable interpretation of the phrase ‘fault of [the Contractor]’ in the force majeure clause is ‘fault of [the Contractor] and those to whom it delegates its responsibilities under the contract’”. Accordingly, the delays were not excused as force majeure.

The Contractor also asserted that the contract’s liquidated damages provision was not enforceable because it was a penalty. Under Kansas law, the courts weigh two considerations when evaluating the enforceability of liquidated damages provisions. First, whether “the amount is reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach.” Second, whether “the nature of the transaction is such that the amount of actual damage resulting from the default would not be easily and readily determinable.” The Court noted that there is some doubt under Kansas law as to whether Kansas law solely evaluates the reasonableness of the liquidated damages provision prospectively from the time of contract formation, or whether Kansas law also retroactively compares the liquidated damages provision with the actual damages suffered. The City argued that the Circuit Court should only look from the single perspective of reasonableness measured from the time of contract formation. The Contractor asked the Court to consider the actual damages the City may have suffered. The Circuit Court affirmed the District Court’s decision without deciding how Kansas law determines the reasonableness of a liquidated damages provision. The Court found that even if the Court agreed with the Contractor and compared the City’s actual damages to the liquidated damages provision, the liquated damages provision would have been reasonable.

The Contractor also argued that the District Court was incorrect in apportioning delay between the Contractor and the City rather than denying the City all liquidated damages. The Contractor asserted that because the District Court had found that the City breached and was responsible for some delays, the City was not entitled to any liquidated damages for untimely performance. Essentially, once a party violates a contract’s terms, it has abrogated all the terms of the contract and cannot enforce its rights thereunder. The Circuit Court stated that Kansas contract law follows the parties’ intentions rather than formalism. Accordingly, the Circuit Court sought a reasonable interpretation of the parties’ agreement. The Court held, “apportionment of damages based on fault comports with modern notions of fairness, as reflected, for example, in the near-universal adoption of comparative responsibility in tort actions.” Accordingly, the damages for delay should be imposed for only those delays for which the Contractor was responsible. However, the remedy was not abrogated altogether on the ground that a portion of the delay caused by the City.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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