Precise Contract Language Is the Key to Avoiding Liquidated Damages
An owner’s termination for convenience does not preclude entitlement to liquidated damages
|Audrey K. Kwak|
A contractor’s risk of being assessed liquidated damages for delayed performance looms large on any public or private contract. Conventional wisdom has always held, however, that a contractor need not fear liquidated damages if terminated by the owner for convenience, rather than for cause. That’s because a termination for convenience, by definition, means that termination was not due to performance, timely or otherwise, by the contractor.
But a recent Connecticut case, Old Colony Construction LLC v. Town of Southington (2015), calls into question this long-standing and common-sense notion. Instead, contractors and owners alike should be aware of this decision, in which the court focused not on the nature of the termination but on the express language of the parties’ contract, even though doing so conferred upon the owner a considerable windfall.
In the case, the court considered a contractor’s argument that the project owner, the town of Southington, was not entitled to liquidated damages because the town had terminated the contractor for convenience on a pump-station replacement.
The contract itself provided that time was of the essence and provided for liquidated damages in the amount of $400 for each day that substantial completion exceeded the contract’s substantial completion date. After significant delays on the project—attributable both to the contractor and the town—the town terminated the contract on the basis of convenience more than two and a half years after the contract’s substantial completion date had passed.
After termination, the contractor and the town each filed claims against the other. The trial court concluded that the contractor was entitled to more than $164,000 for completed, unpaid work. However, the court also determined that the town was entitled to liquidated damages of $315,000 for 789 days of delay. The liquidated damages award offset the contractor’s damages and resulted in a net judgment for the owner of more than $150,000.
The contractor appealed, arguing that because a termination for convenience avoids liability for the contractor’s expectation damages and the risks associated with proving termination for cause, the owner should forfeit the traditional “default-based remedies” of termination for cause.
“The appellate court disagreed, based on the express language of the contract.”
The appellate court disagreed, based on the express language of the contract. The court noted that the contract’s termination-for-convenience clause specifically allowed for termination “without cause and without prejudice to any other right or remedy,” and this broad reservation of rights and remedies was to be given full effect without evidence of a more limited intent.
Furthermore, even if such a limitation did exist following termination for convenience, the town’s claim for liquidated damages would not be impaired because its right to such damages arose as soon as the substantial completion date passed and the damages continued to accrue until termination of the contract.
The Connecticut Supreme Court agreed with both lower courts, holding that the town’s pursuit of liquidated damages did not deprive the contractor of rights it would have had if it had been terminated for cause. The court also observed that the contractor was not exposed to the costs of project completion, for which it would have been liable if terminated for cause. The supreme court thus agreed with the trial court that the town’s decision to terminate the contract for convenience did not preclude it from recovering liquidated damages.
The Old Colony case illustrates, once again, why it is critical to negotiate clear contractual terms. Among the most sensitive of those relate to default, right-to-cure, termination and the parties’ rights in the event of a breach. Of course, those items are the most critical to get right.