Type: Law Bulletins
Date: 06/17/2013

A Defense To Liquidated Damages: Owner Failure To Provide Timely Notice Of Claim

Imagine a situation where a contractor and an owner have both caused delays on a construction project, resulting in significant damages to both. Then imagine that neither the owner nor the contractor provided any timely written notice to the other that it would make a claim based on these delays until well after the project was over. Does the contractor have any defense if the owner makes a claim for liquidated damages due to the delay?

For many years, courts denied an owner’s claim for liquidated damages under this scenario based on the doctrine of “concurrent delay.” The doctrine states that if the owner is partially at fault for the delays in the project, the owner is not entitled to liquidated damages. It was well-stated by the Ohio Court of Claims in 2003 in a case that was later reversed:

[W]here an owner and a contractor are each responsible for a certain amount of unreasonable delay in completing the work, the owner is barred from assessing the contractor with liquidated damages for whatever delay might have occurred in the completion of the work. Dugan & Meyers Construction Co., Inc. v. State of Ohio Dept. of Admin. Ser., 2003 WL 21640882, at *14 (2003). 

When this case came before the Ohio Supreme Court on appeal, however, the court did not apply the “concurrent delay” doctrine. Instead, it held that the contractor had failed to provide timely notice of its claim for an extension of time pursuant to the express terms of the contract and thereby, also per the express terms of the contract, waived any defense to the imposition of liquidated damages. In other words, despite the fact that the owner caused delay, the owner was free to impose liquidated damages on the contractor. Dugan & Meyers Construction Co., Inc. v. Ohio Dept. of Admin. Ser., 113 Ohio St.3d 226, 234, 864 N.E.2d 68, 76 (2007). The implications of this new rule were starkly stated by a California court:
“It makes no difference whether [the contractor’s] timely performance was possible or impossible under the circumstances. The purpose of [these] contract provisions . . . is to allocate to the contractor the risk of delay costs – even for delays beyond the contractor’s control – unless the contractor follows the required procedures for notifying the owner of its intent to claim a right to an extension.” Greg Opinski Construction, Inc. v. City of Oakdale, 199 Cal. App. 4th 1107, 132 Cal. Rptr.3d 170 (2011).
For the contractor who has not submitted a timely request for an extension of time, the results can be very harsh under these cases, with the contractor suffering significant liquidated damages despite the owner being primarily at fault. Nonetheless, under some circumstances, the contractor may have an additional defense to such a claim by an owner.

At least two courts have held that the same mandatory notice provisions that require a contractor to submit a timely notice of claims similarly require the owner to provide timely notice of a liquidated damages claim. In the first case, the court considered a claim for liquidated damages by an owner who had given no timely notice of its claim. Hedenberg and Company, Inc. v. St. Luke’s Hospital of Duluth, 1996 WL 146732 (Minn. Ct. App. Apr. 2, 1996). The contract, in very typical language, defined a “claim” as “a demand or assertion by one of the parties seeking, as a matter of right . . . payment of money.” Claims were required to be made by written notice. Further, written notice of all claims was required to be made within 21 days “after the occurrence of the event giving rise to such claim . . . .”  The court held that the owner’s claim for liquidated damages was indeed a “claim” for which timely notice was required to be given. The court further found that the owner did not provide such notice and then upheld the lower court’s decision barring the owner’s liquidated damages claim.

A court in Tennessee recently came to the same conclusion and reversed a trial court’s ruling in which the trial court had refused to apply the notice requirement to the owner’s claim. RCR Building Corporation v. Pinnacle Hospitality Partners, 2012 WL 5830587 (Tenn. Ct. App. Nov. 15, 2012). Based on the same reasoning as in Hedenberg, the Tennessee court held that the owner’s liquidated damages claim was barred.

These two cases are consistent with the current broader trend in Ohio and elsewhere to enforce the plain terms of construction contracts. Contractors should be ready to assert failure of notice where an owner imposes liquidated damages without having given timely notice of its claim. Owners should be careful to give such notice to protect such a claim. Moreover, parties should carefully consider when such notice should be given. Under these two cases, notice should be given within 21 days after the date for substantial completion has passed at a minimum. In addition, under some circumstances, notice ought to be given within 21 days of the first knowledge that the project was behind schedule, possibly missing other milestone dates, and was projected not to complete on time.

Both contractors and owners should be very vigilant in giving notices required under their contracts, or they risk losing important rights.

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