Reliance Ins. Co. v. Utah Dept. of Transp.

• Decision Date: 16 August 1993
• Docket Number: No. 910413,910413
• Citation: 858 P.2d 1363
• Parties: RELIANCE INSURANCE COMPANY, Plaintiff and Appellant, v. UTAH DEPARTMENT OF TRANSPORTATION, Defendant and Appellee.
• Court: Utah Supreme Court

Page 1363

858 P.2d 1363

RELIANCE INSURANCE COMPANY, Plaintiff and Appellant, v. UTAH DEPARTMENT OF TRANSPORTATION, Defendant and Appellee.

No. 910413.

Supreme Court of Utah.

Aug. 16, 1993.

Clark B. Fetzer, Patrick S. Hendrickson, Salt Lake City, for plaintiff.

R. Paul Van Dam, Atty. Gen., Leland D. Ford, Asst. Atty. Gen., Salt Lake City, for defendant.

HOWE, Associate Chief Justice:

Reliance Insurance Company appeals from a judgment enforcing a liquidated damages provision in a construction contract against a contractor. We examine the validity of the liquidated damages provision and determine whether the doctrine of substantial completion applies to these facts.

FACTS

In the spring of 1985, the Great Salt Lake was rising to near-record levels and threatening a portion of Interstate Highway 80 which runs along the south shore of the lake, west of Salt Lake City. On April 30, 1985, the Utah Department of Transportation ("UDOT") awarded a construction contract to L.A. Young Sons Construction Company ("Young") to raise a section of the highway and protect it from the lake waters. The contract price for the entire project was approximately $9,941,000.

Young began work on May 2, 1985. The contract required that the project be completed by October 15, 1985. In relevant part, it stated:

When the contract completion time is an affixed calendar date, it shall be the date on which all work on the project shall be completed.

The contract also included a provision for liquidated damages of $600 for every day [F]or each calendar day ... after a specified completion date that any work shall remain uncompleted ..., the sum specified below will be deducted from any money due the contractor, not as a penalty, but as liquidated damages for Department's increased overhead.

that work continued beyond the October 15 completion date:

....

When final acceptance has been duly made by the Engineer as prescribed, ... the daily time charge will cease.

On October 14, 1985, Young requested and received a 10-day extension to lay asphalt. The major work of the project was finished by October 25, 1985, and the highway was fully opened for travel. Still, further work remained, such as installing signs, furnishing topsoil, and seeding. The project also lacked some landscaping and permanent paint striping. These uncompleted requirements extended the work into the winter months, but due to weather conditions, no work was done between January 14 and February 24, 1986. Consequently, UDOT granted an additional 42-day extension for this winter time period.

Work on the project resumed on February 25, 1986, and continued intermittently until September 12, 1986. UDOT terminated time charges on June 13, 1986, after the topsoil was placed and the seeding and striping completed. Ultimately, UDOT granted an additional 43-day extension of time charges due to its own error in the process of clearing a materials site.

Plaintiff Reliance Insurance Company was surety on Young's bond. Young eventually defaulted on several other projects, and Reliance intervened and made payments on behalf of Young. Reliance thereby became subrogated to Young's claim against UDOT on this project. Reliance is the sole appellant in this case, and Young is not a party to this appeal.

Reliance and UDOT both agree that the sum of the allowed extensions was 85-days and that the final delay equaled 156 days. At $600 per day, the total liquidated damages withheld was $93,600. The project was federally aided and qualified for reimbursement of over ninety-four percent of the cost of approved contract items by the federal government. UDOT consulted with the Federal Highway Administration ("FHWA") during the course of the project, and the FHWA was involved in granting extensions to the contracted time period.

Reliance brought this action to recover the $93,600 withheld by UDOT. Trial was had to the bench. The trial court upheld the liquidated damages provision as binding upon the parties. It also concluded that the doctrine of substantial performance raised by Reliance was inapplicable to these facts and therefore UDOT could retain the $93,600 as appropriate liquidated damages.

STANDARD OF REVIEW

This court gives deference to the trial court's findings of fact, and we will not set them aside unless we find them to be clearly erroneous. Utah R. Civ.P. 52(a). Under this standard, we will not disturb factual findings unless they are against the clear weight of the evidence or we otherwise reach a definite and firm conviction that a mistake has been made. Western Kane County Special Serv. Dist. No. 1 v. Jackson Cattle Co., 744 P.2d 1376, 1377 (Utah 1987). We review the trial court's legal conclusions for correctness, affording no deference. Ong Int'l (U.S.A.) v. 11th Ave. Corp., 850 P.2d 447, 452 (Utah 1993).

ANALYSIS

In determining the validity of a liquidated damages provision, this court has adopted section 339 of the Restatement of Contracts. Robbins v. Finlay, 645 P.2d 623, 626 (Utah 1982); Perkins v. Spencer, 121 Utah 468, 476-77, 243 P.2d 446, 450-51 (1952). Section 339 states in pertinent part:

(1) [A]n agreement, made in advance of breach fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless

(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and

(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.

Restatement of Contracts § 339 (1932) [hereinafter Restatement]. We will examine the validity of the UDOT provision for liquidated damages according to this standard.

I. REASONABLE FORECAST

The Restatement's test first requires that the liquidated damages provision be a reasonable forecast of any actual increased overhead incurred by UDOT because of the delayed completion of the project. If it turns out that the liquidated damages and the actual increased overhead are reasonably related, this is persuasive evidence that the initial forecast was also reasonable. If, on the other hand, the liquidated damages are disproportionate to the actual compensatory damages sustained, this may be evidence of an unreasonable forecast and the provision may be deemed a penalty and not enforced. Young Elec. Sign v. United Standard West, 755 P.2d 162, 164 (Utah 1988) (citing Madsen v. Anderson, 667 P.2d 44, 47 (Utah 1983)). However, any disparity must be "grossly excessive" and must "shock the conscience" of this court before we declare the liquidated damages void. Allen v. Kingdon, 723 P.2d 394, 397 (Utah 1986).

Whether an amount was a reasonable forecast is determined by looking at the contract, not at the time of its breach, but rather at the time of its formation. Perkins, 121 Utah at 474, 243 P.2d at 449; Hanlon Drydock & Shipbuilding Co. v. McNear Inc., 70 Cal.App. 204, 213, 232 P. 1002, 1005-06 (Dist.Ct.App.1925). In other words, if the parties were honestly trying to arrange in advance a fair basis for determining actual damages, it makes no difference whether this arrangement turns out to be too much or too little. Hanlon Drydock, 70 Cal.App. at 212, 232 P. at 1005; Restatement § 339 cmt. (1); 5 Arthur L. Corbin, Law of Contracts § 1060, at 351-52 (1964) [hereinafter Corbin] (honest and reasonable effort at preestimation will be sustained). In determining whether the liquidated damages are excessive, this court will not look back with twenty-twenty hindsight after the breach has occurred. Instead, we will examine the $600-per-day stipulation as Young and UDOT initially did, looking forward from the time of formation.

The issue of whether liquidated damages are a reasonable forecast of actual damages is one of fact. We therefore give deference to the trial court's finding that there was a reasonable correlation between the damages actually incurred and those provided for in the liquidated damages provision of the contract. The trial court heard the testimony of UDOT employees and saw the documentary evidence, including time logs and expense reports. The trial court had the opportunity to judge the credibility of each witness. This court is not in the same position to determine factual disputes, and it is because of this disadvantage that we afford deference to the lower court. Western Kane County, 744 P.2d at 1377.

Reliance contends that the $93,600 assessed under the liquidated damages clause is not proportionate to the actual damages incurred by UDOT. In calculating the actual damages and in determining their reasonableness, this court is limited by those extra costs that UDOT incurred as a result of Young's delay. The liquidated damages clause specifically states that the $600-per-day assessment is not intended as a penalty but is intended to reimburse UDOT for increased overhead.

At trial, the parties agreed that UDOT incurred additional overhead as a result of Young's delay. These costs included equipment rental, employee salaries, and utility bills. However, Reliance and UDOT disagreed on how to calculate this increased overhead. Both sides presented documentary evidence and oral testimony as to specific expenditures on specific dates. There are some factual disputes as to how much overhead was actually incurred as a result of Young's delay. In marshaling the evidence, Reliance contends that the actual increased overhead was only a fraction of the claimed $93,600. UDOT counters that the amount withheld is reasonable and, in fact, the actual increased overhead surpassed this figure. UDOT adds that its typical daily overhead charges exceeded $1,000.

There is some evidence supporting both sides of this argument. UDOT's engineer testified that several employees were required to be present on the project during the time of the delay and consequently UDOT incurred significant charges. It is also evident that the overhead expenses were not uniform throughout the delay but varied...