SAN FRANCISCO—Construction delays are sometimes unavoidable but disputes over delays can get mired in legal tangles, which may be avoidable. In the second of a two-part exclusive, Cox, Castle & Nicholson LLP partner Robert Campbell discussed some of the areas to sidestep in damage provisions, ways to minimize litigation and arbitration in complex construction delays.

GlobeSt.com: What are some common mistakes to avoid in a liquidated damages provision? How are these provisions enforceable–or not enforceable–by law?

Campbell: In many states, including California, liquidated damages clauses are presumptively valid. In California, the general test for enforcement is whether the amount set as liquidated damages represents the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained. The failure to satisfy this legal standard may render the provision an unenforceable penalty. Typically, both owners and contractors want liquidated damages provisions in contracts to replace consequential damages. This helps each side define the risk of project delay. However, owners often fail to adequately assess how they will be actually harmed by project delay, which leads them to agree to liquidated damages provisions, which badly undercompensates them for project delay. Such provisions, from both a legal and fairness perspective, should attempt to forecast and monetize the damage an owner is likely to incur.

Liquidated damages clauses are coming under increasing attack. We recommend the parties, particularly the owner, document at the time of contracting the considerations used to develop and monetize liquidated damages. Too often the parties merely agree to an arbitrary amount without actually estimating future loss. “Plug numbers” may not satisfy the legal test for an enforceable liquidated damages clause.

GlobeSt.com: What are some ways to avoid litigation during and after project closeout?

Campbell: Take responsibility and communicate honestly. Disputes are generally born from inflexible and competitive personalities and by a failure to take responsibility for causing project problems. Furthermore, resolve disputes along the way and don't save them until project completion. Even if you cannot resolve all disputes, resolve as much as you can to minimize disputes at project completion. Finally, negotiate and draft a good contract and follow it. It is not unusual for a project manager, during litigation, to answer that he or she did not read the prime contract at all or only reviewed limited parts of it. Having a good contract does not do much good if you don't follow it.

GlobeSt.com: How would involved parties know if a judicial reference route is right for a construction delay suit? What are the advantages? Disadvantages?

Campbell: I am a proponent of judicial reference and arbitration in complex construction delay cases. Judicial reference involves the selection and utilization of a private judge who effectively presides as a trial court judge. On balance, it is my experience that judicial reference can save time and money, and offers the parties a more predictable result than the court system. It allows the parties to select a judge or lawyer who is knowledgeable in construction and understands delay analysis. If you want to confuse a trier of fact or put him or her to sleep, put competing delay experts in a court room and let them explain critical path delay analysis. Considering the large amounts which are often at stake in delay cases, the parties should want a trier of fact who has a reasonable chance of understanding the concepts and evidence. It is too much to expect a disinterested judge or juror to understand complicated technical concepts described in an almost foreign language. In addition, delay cases are often complicated multi-party matters which reasonably require significant time to manage. While ordinary trial courts typically lack the time and resources to effectively manage such cases, referees have the time and flexibility to more effectively do so. Finally, in California, appellate review is preserved in judicial reference, which is normally not the case in arbitration.

Cox Castle

GlobeSt.com: What are some common mistakes to avoid in a liquidated damages provision? How are these provisions enforceable–or not enforceable–by law?

GlobeSt.com: What are some ways to avoid litigation during and after project closeout?

GlobeSt.com: How would involved parties know if a judicial reference route is right for a construction delay suit? What are the advantages? Disadvantages?

Instant Insights /

Owners May Fail to Assess Harm Caused by Delays

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