Carrothers Const. Co., L.L.C. v. City of South Hutchinson

• Decision Date: 22 May 2009
• Docket Number: No. 98,023.,98,023.
• Citation: 207 P.3d 231
• Parties: CARROTHERS CONSTRUCTION COMPANY, L.L.C., Appellant, v. CITY OF SOUTH HUTCHINSON, Kansas, Appellee.
• Court: Kansas Supreme Court

207 P.3d 231

CARROTHERS CONSTRUCTION COMPANY, L.L.C., Appellant, v. CITY OF SOUTH HUTCHINSON, Kansas, Appellee.

No. 98,023.

Supreme Court of Kansas.

May 22, 2009.

Anthony M. Singer, of Woodard, Hernandez, Roth & Day, L.L.C., of Wichita, and Richard W. Miller, of Miller Law Firm, P.C., of Kansas City, Missouri, argued the cause, and Stephen R. Miller and Christine A. Louis, of the same firm, and Patrick J. Kaine, of Dysart Taylor Cotter & McMonigle, P.C., of Kansas City, Missouri, were with Richard W. Miller on the briefs for appellant.

Michael J. Norton, of Foulston Siefkin LLP, of Wichita, argued the cause, and James D. Oliver, of the same firm, was with him on the briefs for appellee.

The opinion of the court was delivered by BILES, J.:

This is an appeal from a district court's decision on cross-motions for summary judgment in a contract case. The district court awarded liquidated damages against a construction company for failure to timely complete a municipal wastewater treatment facility. The issue is the extent to which liquidated damages are enforceable under the parties' contract. The Court of Appeals affirmed the district court. This court granted the construction company's petition for review. Our jurisdiction arises from K.S.A. 20-3018(b).

We affirm. In doing so, we explain below that the reasonableness of a liquidated damages clause in a contract deliberately entered into should be determined with regard to the conditions of the parties existing at the time the contract was executed, not from hindsight after the contract is breached. In addition, we reject the construction company's argument that liquidated damages for completion delays cannot be assessed after the owner occupied the new facility.

Factual and Procedural Background

The material facts are not in dispute. Carrothers Construction Company, L.L.C., entered into a contract with the City of South Hutchinson to construct a $5,618,000 wastewater treatment facility to replace the City's existing plant. The contract contained completion dates as well as a liquidated damages provision for delays in meeting the completion dates.

Carrothers has acknowledged it did not meet those bargained-for completion deadlines, and it conceded at oral argument an assessment for some liquidated damages under the contract is appropriate. Accordingly, the dispute before this court reduces itself down to deciding whether the district court was correct as to exactly how much the liquidated damages should be under the contract.

The provision labeled "Liquidated Damages" is found in the contract at Section 3.3 and is plainly identified. In it, Carrothers and the City agreed as follows:

"3.3 Liquidated Damages. OWNER and CONTRACTOR recognize that time is of the essence of this Agreement and that OWNER will suffer financial loss if the Work is not started and completed within the times specified in paragraphs 3.1 and 3.2 above, plus any extensions thereof allowed in accordance with Article 12 of the General Conditions. They also recognize the delays, expense and difficulties involved in proving the actual loss suffered by OWNER if the Work is not completed on time. Accordingly, instead of requiring any such proof, OWNER and CONTRACTOR agree that as liquidated damages for delay (but not as a penalty) CONTRACTOR shall pay OWNER Six Hundred Dollars ($600.00) for each day that expires after the time specified in paragraph 3.1 for the work to start, and Eight Hundred Fifty Dollars ($850.00) for each day that expires after the time specified in paragraph 3.2 for Substantial Completion until the Work is substantially complete. After Substantial Completion, if CONTRACTOR shall neglect, refuse or fail to complete the remaining Work within the time specified in paragraph 3.2 for completion and readiness for final payment or any proper extension thereof granted by OWNER, CONTRACTOR shall pay OWNER Eight Hundred Fifty Dollars ($850.00) for each day that expires after the time specified in paragraph 3.1 for completion and readiness for final payment."

The standard general conditions of the construction contract (see Section 8.5 incorporating general conditions) define the term "Work" in Article 1 as follows:

"48. Work — The entire completed construction or the various separately identifiable parts thereof required to be provided under the Contract Documents. Work includes and is the result of performing or providing all labor, services, and documentation necessary to produce such construction, and furnishing, installing, and incorporating all materials and equipment into such construction, all as required by the Contract Documents."

Article 1, entitled "Work," further provides:

"The project for which the Work under the Contract Documents may be the whole or only a part is generally described as follows:

Construct wastewater treatment liquid process facilities to replace the existing liquid process facilities. Construct a maintenance building, site piping, other site utilities, site grading, and system controls. Drain, clean existing basins for future use and remove obsolete equipment. The capacity of the new process facilities will be 2 MGD. A new computer based control system for the improvements is included in the Work."

The contract documents also define the term "Substantial Completion" as:

"43. Substantial Completion — The time at which the Work (or a specified part thereof) has progressed to the point where, in the opinion of ENGINEER, the Work (or a specified part thereof) is sufficiently complete, in accordance with the Contract Documents, so that the Work (or a specified part thereof) can be utilized for the purposes for which it is intended."

The term "final completion" is not defined in the contract. But in describing how the contractor may apply for final payment under Section 14.07 A.1., the agreement provides:

"A. Application for Payment. 1. After CONTRACTOR has, in the opinion of ENGINEER, satisfactorily completed all corrections identified during the final inspection and has delivered, in accordance with the Contract Documents, all maintenance and operating instructions ... CONTRACTOR may make application for final payment following the procedure for progress payments."

The provisions recited above show at the time the contract was entered into by the parties, the City and Carrothers agreed: (1) Time was of the essence in completing the project; (2) actual damages would be difficult to ascertain, so the parties chose to use the liquidated damages provision if a breach occurred rather than requiring proof of actual damages; (3) the same per diem amount of liquidated damages applicable to a failure to achieve substantial completion would apply to a failure to achieve final completion; (4) the $850 per diem liquidated damages amount for failure to achieve either substantial or final completion was not a penalty; and (5) the project engineer's opinion would be relied upon by both parties to determine whether the completion dates were met. The record reflects Carrothers had multiple opportunities to object to the liquidated damages provision during the bidding and contracting process, but it did not.

The engineer for this project was MKEC Engineering Consultants, Inc. (MKEC), which also assisted in drafting the contract. An MKEC employee, David Chase, performed the calculations for the liquidated damages provision. Lynn Moore, MKEC's manager of environmental engineering, discussed those calculations with Chase and approved the liquidated damages provision. MKEC considered several factors in determining prospective liquidated damages caused by delay in the work completion including: (1) the City's cost to monitor the project; (2) additional labor costs for city employees, environmental department staff, structural and electrical staff, and controls department staff; (3) additional utilities use; (4) costs to engage another consultant; (5) legal expenses; (6) equipment rental to address flow situations; (7) action by the Kansas Department of Health and Environment if the treatment plant failed to operate within permit limits at the time construction should be finished; and (8) other unknowns if the project was not timely completed. In addition, MKEC considered the project length, the estimated contract value, the general practices by MKEC, and the amounts agreed to between contractors and owners on other comparable projects.

Based on these considerations, MKEC recommended liquidated damages be set at $850 per day for failure to meet both the substantial completion deadline and the final completion deadline. Moore testified the same $850 per day liquidated damages amount for both substantial completion and final completion was appropriate because "all of the same potential risks were still in place with either completion date, and so it was appropriate to use the same number." Both the City and Carrothers agreed to MKEC's recommendation by accepting the contract.

Carrothers executed the contract with the City to construct the wastewater treatment facility for $5,618,000. On April 22, 2002, the City issued a notice to proceed with construction. The agreement provided the work, as defined in the contract, was to be substantially complete within 450 days after the notice to proceed and was to be complete and ready for final payment within 480 days after the notice to proceed. Accordingly, Carrothers was to reach substantial completion by July 15, 2003, and final completion by August 14, 2003. Change orders issued during construction added 11 days to these deadlines, thus extending the substantial completion date to July 26, 2003, and final completion to August 25, 2003. Carrothers acknowledges it failed to meet either deadline.

The City put the new plant into limited operation by November 10, 2003, and simultaneously shut down and stopped using the old wastewater treatment facility by that same date. There was no loss of water service when this...