Construction Delays and Liquidated Damages

For contractors and property owners, a construction delay is a serious matter, especially when it pushes overall project completion past the contracted deadline. A December 2009 Arizona Court of Appeals ruling, in Richard E. Lambert, Ltd. v. City of Tucson, illustrates the importance of finishing a project on time – and the consequences for failing to do so.

• See Related Article: Beware of "No Damages for Delay" Clauses

Background. In 2003, Richard E. Lambert, Ltd. (“REL”) contracted with the City of Tucson to make improvements to a neighborhood center. The project included improving a gymnasium and adding irrigation and landscaping to the sports fields that surround the center.

The contract required REL to begin work by January 5, 2004, and to complete the project by February 3, 2005. It also provided that, if any part of the project was delayed, REL would move forward with other parts of the project that were unaffected by the delay.

REL completed the project on December 19, 2005 – 319 days after the agreed completion date. The City assessed $500 per day in liquidated damages against REL and retained the final $108,300 due on the project.

REL appealed to the City Contract Officer, who upheld the assessment and retention. REL then appealed to the Director of Procurement, resulting in an evidentiary hearing. At that hearing, the administrative officer heard arguments regarding the causes of REL’s delays and ultimately upheld the Contract Officer’s ruling.

REL filed a special action in Pima County Superior Court, relying on a contract provision that granted REL a time extension in the event of delays that were beyond REL’s control.

Both sides filed motions for summary judgment. Without holding an evidentiary hearing, the Superior Court judge ruled in REL’s favor, concluding that the Procurement Director’s factual findings were arbitrary, capricious and unsupported by facts. The judge also reduced the liquidated damages to $13,500 and awarded REL its attorney fees.

Appeal. The City appealed the dismissal to the Arizona Court of Appeals, which ruled that the judge erred in granting REL’s motion for summary judgment.

The Court’s ruling contains two conclusions that are more valuable to lawyers and judges than to contractors:

• First, with respect to motions for summary judgment, the Court of Appeals reaffirmed that summary judgment is appropriate if “no genuine issues of material disputed facts remain, and the moving party is entitled to judgment as a matter of law.” In this case, there were a number of disputed facts.
  

• Second, the Court noted that, in determining whether an administrative decision is arbitrary or capricious, the Superior Court “may not weigh the evidence on which the decision was based” [emphasis added]. Rather, the decision is not arbitrary or capricious if it is supported by evidence. As for the quality of the evidence, the trial court may not substitute its own judgment for that of the administrative officer.
  

Delay in Completion. Of specific interest to contractors is the issue of construction delays. While REL was required to complete the entire project by a certain date, the contract also entitled REL to an extension if the project was delayed because of “unforeseeable causes beyond [REL’s] control.” The Court noted that REL, in justifying the delay, bore the burden of proof on two issues:

• that the delay was excusable, and

• that the excusable event caused a delay to the overall completion of the contract.
  

The latter burden was consistent with the contract’s requirement that, if one portion of the project was delayed, REL was to continue work on other portions. The Court noted that “an interruption in one phase of the work … does not always result in an increase in the time necessary for total performance” or overall completion.

The City of Tucson conceded that three significant events beyond REL’s control contributed to the delays in completing certain phases of the project. However, the City argued – and had substantial evidence – that the overall completion of the work had been delayed not by these events but rather by inadequate staffing, poor supervision and other causes that were within REL’s control. In addition, one of the delaying events – an arson fire in the gymnasium – occurred more than a month after REL’s completion deadline, when REL was already six months behind schedule, and should not have impeded REL’s progress in the other phases of the project (e.g., playground construction, extensive concrete and stucco work, demolition, etc.).

The Court determined that REL’s failure to “progress onward” with the remainder of the project constituted substantial evidence for a reasonable Procurement Director to conclude that the arson fire “had no impact on [REL’s] ability to complete building and site work that was incomplete on the date of the fire.” The Court found that other significant events that excused delays in certain phases of the project similarly failed to excuse REL’s delays in phases unaffected by those events.

In the end, the Court ruled that, the Procurement Director’s findings against REL were based in fact and were not arbitrary or capricious. The Court vacated the Superior Court’s grant of summary judgment and sent the case back to Superior Court.

Lessons Learned. For contractors, the lessons in REL v. City of Tucson are clear. First, finish your jobs on time. Second, don’t think that justifiable delays in one phase of a project are going to excuse you from timely completion of the other phases.