Contractor Liable for Liquidated Damages Because It Failed to Properly Seek Extension of Time
The Fifth Appellate District of the California Court of Appeal recently issued an opinion that has important implications to all stakeholders in California’s construction industry. In Greg Opinski Construction, Inc. v. City of Oakdale, Nos. F060219, F060727, 2011, 2011 WL 4625304 (Cal. Ct. App. Oct. 6, 2011), the California Court of Appeal held that where a contract contains specific requirements for obtaining an extension of time, and a contractor fails to comply with those requirements, it is barred from later contesting its liability for any project delays.
The Greg Opinski opinion has significant implications for the California construction industry. Principally, the opinion means that contractors must timely submit claims for alleged owner-caused delays in compliance with the terms of their contracts, or else risk suffering the fate of the general contractor in this case and be barred from contesting liability for delayed completion. The opinion also means, as may have been the case here, that a contractor may ultimately be held liable for liquidated damages stemming from owner-caused delays. This is problematic for a number of reasons, primarily because strict compliance with these provisions is often quite difficult and is rarely enforced by the parties. It remains to be seen whether the litigants will appeal to the California Supreme Court, or what the true impact of Greg Opinski will be, but for now it seems like an opinion likely to have a wide ranging impact for years to come.
In Greg Opinski, a city entered into a contract with a general contractor for the construction of a building project. The contract provided for completion of the project within 300 days and provided for liquidated damages of $250 for each day of delay. The project was completed seven months late. The general contractor brought suit against the city for the unpaid balance of the contract and for $24,436 “in excess of the contract price for proposed change orders the city had refused to approve . . . .” The city filed a cross-complaint against the contractor seeking “$54,000 in liquidated damages for lateness” and “$10,000 for defective conditions . . . .”
The General Conditions of the contract provided that the contract price and time for performance could only be changed by way of a change order. The contract provided two means to obtain a change order. First, a change order could be executed by mutual agreement of the parties. Second, a change order could be issued to “embody the substance of any written decision rendered by the engineer” pursuant to provisions which authorized the project engineer to “rule on claims by the parties for changes in the time or price” of the contract. A party making a claim to the engineer was required to give written notice of the claim to the engineer and the other party within thirty days “after the occurrence of the event giving rise thereto.”
After a bench trial, the trial court awarded the city $54,000 in liquidated damages, and ruled that the city properly withheld the balance of the contract. The court rejected the general contractor’s claims for unpaid change orders, finding that the general contractor “failed to submit them within 30 days as required by the contract.” The trial court also declined to rule on which party was to blame for the delayed completion. According to the trial court, which party delayed completion was irrelevant, because the contract could only be extended by change order. Because the parties did not use either change order procedure, the contract time was never extended, and the contractor was liable for the resulting liquidated damages, regardless of which party was to blame for the delay.
The contractor appealed, arguing that the trial court erred in awarding liquidated damages “on the ground that if no extension was requested or granted through the required procedures, then it did not matter which party, if either, was to blame for the delays, since the contract barred extensions of time for any reason except pursuant to those procedures.” The contractor argued that liquidated damages could not be awarded for any portion of the delay caused by the city, even if the contractor failed to comply with the contract’s provisions for obtaining an extension.
The Court rejected the general contractor’s arguments. In doing so, the Court distinguished a prior decision of the California Supreme Court, which held that “[n]oncompliance with a provision requiring an application for an extension of time is not a proper basis for holding a contractor liable in liquidated damages for late completion caused by the owner’s conduct.” Peter Kiewit Sons’ Co. v. Pasadena City Junior College Dist., 59 Cal. 2d 241, 245 (1963). The Court pointed out that in Peter Kiewit the Supreme Court relied on section 1511 of the California Civil Code as the basis of its opinion. At the time the Peter Kiewit opinion was decided, section 1511 (as interpreted by the Peter Kiewit Court) provided that a contractor’s failure to perform was excused to the extent the failure to perform was caused by the owner’s delay, and importantly, that this rule could not be contracted around, by, for example, requiring claims for delay to be submitted within a certain period of time.
In distinguishing Peter Kiewit, the Greg Opinski Court noted that California Civil Code section 1511 was amended two years after the Peter Kiewit opinion was issued, and as a result Peter Kiewit was effectively superseded by statute. According to the Greg Opinski Court, under the amended and current version of section 1511, parties to a construction contract may agree that a contractor “intending to avoid the effect of its failure to perform by asserting that [the owner’s acts] caused the failure must give written notice of this intention within a reasonable time.”
The Court then ruled that the provisions of the parties’ contract fell within those contemplated by section 1511, and thus “[i]f the contractor wished to claim it needed an extension of time because of delays caused by the city, the contractor was required to obtain a written change order by mutual consent or submit a claim in writing requesting a formal decision by the engineer. It did neither.” Therefore, the Court ruled that the trial court did not err in relying on the contractor’s “failure to enforce the terms of the contract” as a basis for awarding liquidating damages to the city.