B-154655, JULY 30, 1964, 44 COMP. GEN. 40

B-154655, JULY 30, 1964, 44 COMP. GEN. 40

CONTRACTS - DAMAGES - LIQUIDATED - SUBSTANTIAL PERFORMANCE. CONTRACTS - DAMAGES - LIQUIDATED - APPORTIONMENT IN THE PERFORMANCE OF A CONTRACT FOR TWO SEPARATE JOBS WHICH PROVIDED FOR THE ASSESSMENT OF LIQUIDATED DAMAGES IN EVENT OF DELAY, BUT NOT FOR THE APPORTIONMENT OF THE DAMAGES, THE CONTRACTOR WHO COMPLETED ONE JOB UNIT COMPRISING 95 PERCENT OF THE WORK, BUT WAS DELAYED 120 DAYS IN COMPLETING 2 PERCENT OF THE SMALLER JOB ALTHOUGH NOT ENTITLED TO AN APPORTIONMENT OF THE LIQUIDATED DAMAGES ASSESSABLE FOR DELAYED PERFORMANCE, THE GOVERNMENT HAVING COMPLETE USE AND BENEFIT OF 98 PERCENT OF THE WORK, THE DOCTRINE OF SUBSTANTIAL PERFORMANCE MAY BE INVOKED TO PRECLUDE THE ASSESSMENT OF LIQUIDATED DAMAGES AGAINST THE CONTRACTOR. WHERE NO PROVISION IS MADE IN A CONTRACT FOR THE APPORTIONMENT OF LIQUIDATED DAMAGES IN THE EVENT OF PARTIAL COMPLETION OF THE WORK, THERE IS NO LEGAL BASIS ON WHICH THE CONTRACT COULD BE CONSTRUED TO AUTHORIZE THE PRORATING OF LIQUIDATED DAMAGES EVEN THOUGH A MAJOR PART OF THE CONTRACT HAD BEEN PERFORMED.

TO THE ADMINISTRATOR OF VETERANS AFFAIRS, VETERANS ADMINISTRATION, JULY 30, 1964:

REFERENCE IS MADE TO LETTER DATED JULY 2, 1964, FROM THE DEPUTY ADMINISTRATOR OF VETERANS AFFAIRS, REQUESTING OUR DECISION ON CERTAIN QUESTIONS RELATIVE TO THE ASSESSMENT OF LIQUIDATED DAMAGES AGAINST THE ALLAN AUTOMATIC SPRINKLER CORPORATION FOR DELAY IN THE PERFORMANCE OF WORK UNDER A CONTRACT.

THE CONTRACT, WHICH WAS EXECUTED ON STANDARD FORMS 23 (CONSTRUCTION CONTRACT) AND 23A GENERAL PROVISIONS (CONSTRUCTION CONTRACT), PROVIDED FOR INSTALLATION, AT A PRICE OF $6,700, OF TWO ALARM-EQUIPPED SPRINKLER FIRE PROTECTION SYSTEMS IN TWO BUILDINGS ON THE GROUNDS OF THE VETERANS ADMINISTRATION HOSPITAL, PALO ALTO, CALIFORNIA. ONE SYSTEM, A COMPLETE SYSTEM FOR BUILDING 302, REQUIRED 164 SPRINKLER HEADS. THE OTHER, A PARTIAL SYSTEM FOR BUILDING 213, REQUIRED ONLY 3 SPRINKLER HEADS.

BY NOVEMBER 18, 1962, THE DATE ON WHICH THE WORK WAS REQUIRED TO BE COMPLETED, THE CONTRACTOR HAD COMPLETED INSTALLATION OF THE ENTIRE SYSTEM FOR BUILDING 302 AND ALL BUT THE ALARM TRANSMITTER IN THE PARTIAL SYSTEM FOR BUILDING 213, OR MORE THAN 95 PERCENT OF THE WORK. BECAUSE OF A MISTAKE ON THE PART OF THE CONTRACTOR IN PLACING HIS ORDER, THERE WAS A DELAY IN RECEIPT OF THE TRANSMITTER FOR THE PARTIAL SYSTEM, AND, THEREFORE, INSTALLATION WAS NOT COMPLETED UNTIL MARCH 18, 1963, OR 120 DAYS AFTER NOVEMBER 18, 1962.

THE CONTRACT PROVISIONS RELATING TO LIQUIDATED DAMAGES ARE AS FOLLOWS:

GENERAL PROVISIONS, CLAUSE 5:

5. TERMINATION FOR DEFAULT--- DAMAGES FOR DELAY--- TIME EXTENSIONS

(C) IF FIXED AND AGREED LIQUIDATED DAMAGES ARE PROVIDED IN THE CONTRACT AND IF THE GOVERNMENT DOES NOT SO TERMINATE THE CONTRACTOR'S RIGHT TO PROCEED, THE RESULTING DAMAGE WILL CONSIST OF SUCH LIQUIDATED DAMAGES UNTIL THE WORK IS COMPLETED OR ACCEPTED.

GENERAL REQUIREMENTS, CLAUSE GR-10:

GR-10. LIQUIDATED DAMAGES:

(A) THE CONTRACTOR SHALL PAY TO THE GOVERNMENT AS COMPENSATION FOR DELAYED POSSESSION, AND NOT AS A PENALTY, THE SUM HEREIN SPECIFIED AS ASCERTAINED AND LIQUIDATED DAMAGES FOR EACH CALENDAR DAY REQUIRED FOR COMPLETION BEYOND THE 90 CALENDAR DAYS PROVIDED FOR IN HIS BID FOR THE COMPLETION OF THE WORK.

(B) THE DEDUCTIONS REQUIRED UNDER THIS ARTICLE FOR FAILURE TO COMPLETE THE WORK INCLUDED UNDER ITEMS 1, 2, AND 3 OF THE BID, IN THE TIME STATED, WILL BE AT THE RATE OF $25.00 PER CALENDAR DAY, ALL, AS SUBJECT TO THE GENERAL PROVISIONS OF STANDARD FORM 23A, CONSTRUCTION CONTRACT.

THE CONTRACTING OFFICER DETERMINED THAT THE DELAY IN COMPLETION WAS NOT EXCUSABLE BECAUSE THE CONTRACTOR WAS NOT WITHOUT FAULT, AND THEREFORE ASSESSED LIQUIDATED DAMAGES AT THE RATE OF $25 PER DAY FOR THE 120-DAY PERIOD OF DELAY, TOTALING $3,000. THE CONTRACTOR FILED A TIMELY APPEAL ON WHICH THERE HAS BEEN A HEARING, BUT DECISION ON THE APPEAL IS BEING DEFERRED PENDING OUR ADVICE ON THE QUESTIONS RAISED BY THE DEPUTY ADMINISTRATOR.

OUR ATTENTION HAS BEEN DIRECTED TO THE FACT THAT WHILE THE CONTRACT PROVIDES FOR TWO SEPARATE WORK JOBS, ONE OF WHICH WAS TIMELY COMPLETED, THE LIQUIDATED DAMAGE CLAUSES DO NOT PROVIDE FOR APPORTIONMENT OF THE DAILY DAMAGE RATE IN THE EVENT ONE UNIT OF WORK IS COMPLETED AND ACCEPTED IN ADVANCE OF THE OTHER UNIT. ALSO, SINCE THE LARGER SYSTEM WAS TIMELY COMPLETED AND THEREAFTER USED BY THE GOVERNMENT, THE DEFAULT EXISTED ONLY IN RESPECT OF THE SMALLER SYSTEM. THUS THERE IS FOR CONSIDERATION WHETHER THE FULL $25 DAILY RATE--- AMOUNTING TO $3,000 ON A $6,700 CONTRACT--- IS A REASONABLE ESTIMATE OF THE DAMAGES INCIDENT TO DELAYED COMPLETION OF THE SMALLER SYSTEM.

IN ADDITION TO THE FOREGOING, THE DEPUTY ADMINISTRATOR STATES THAT SINCE THE GOVERNMENT HAD COMPLETED USE AND BENEFIT OF OVER 98 PERCENT OF THE REQUIRED SPRINKLER SYSTEMS BY THE CONTRACT COMPLETION DATE, CONSIDERATION IS WARRANTED OF THE QUESTION WHETHER THE DOCTRINE OF "SUBSTANTIAL COMPLETION" PRECLUDES THE ASSESSMENT OF LIQUIDATED DAMAGES IN THIS CASE.

THE SPECIFIC QUESTIONS SUBMITTED ARE STATED BY THE DEPUTY ADMINISTRATOR AS FOLLOWS:

(1) MAY THE CONTRACT BE INTERPRETED AS PROVIDING A LIQUIDATED DAMAGE RATE SUBJECT TO APPORTIONMENT WHERE ONLY THE SMALLER OF THE TWO SYSTEMS INVOLVED WAS IN DEFAULT?

(2) IF NOT, DOES THE PROVISION CONSTITUTE AN UNENFORCEABLE PENALTY CLAUSE BECAUSE IT SPECIFIES THE SAME RATE FOR A SMALL PART OF THE WORK THAT IT PROVIDES FOR THE WHOLE?

(3) IF THE SPECIFIED RATE IS NEITHER SUBJECT TO APPORTIONMENT NOR OBJECTIONABLE AS A PENALTY, WAS THE DEGREE OF COMPLETION ACHIEVED BY THE CONTRACTOR PRIOR TO EXPIRATION OF THE CONTRACT TIME SUFFICIENT TO CONSTITUTE "SUBSTANTIAL COMPLETION" SUCH AS WILL PRECLUDE ASSESSMENT OF LIQUIDATED DAMAGES?

IT IS CLEAR FROM THE LANGUAGE OF THE LIQUIDATED DAMAGE PROVISIONS THAT COMPLETE PERFORMANCE BY THE REQUIRED COMPLETION DATE WAS CONTEMPLATED BY THE CONTRACTING PARTIES, AND NO PROVISION WAS MADE FOR APPORTIONMENT OF THE LIQUIDATED DAMAGES IN THE EVENT OF PARTIAL COMPLETION OF THE WORK. ACCORDINGLY, IN ANSWER TO THE FIRST QUESTION, THERE IS NO LEGAL BASIS ON WHICH THE CONTRACT COULD BE CONSTRUED TO AUTHORIZE APPORTIONMENT OF THE LIQUIDATED DAMAGES BECAUSE ONLY THE WORK ON THE SMALLER OF THE TWO SYSTEMS WAS DELAYED.

AS TO WHETHER SUCH PROVISIONS CONSTITUTE AN UNENFORCEABLE PENALTY BECAUSE THE SAME DAMAGE RATE APPLIES TO DELAY ON EITHER A SMALL PART OF THE WORK OR THE WHOLE, SUCH FACT DOES NOT NECESSARILY RENDER THE PROVISIONS UNREASONABLE PER SE. WISE V. UNITED STATES, 249 U.S. 361. ONCE THE PARTIES TO A CONTRACT HAVE AGREED ON THE AMOUNT PAYABLE IN THE EVENT OF DELAY, THE COURTS ARE STRONGLY INCLINED TO ENFORCE THE AGREEMENT AS WRITTEN. 28 COMP. GEN. 435 AND THE CASES CITED THEREIN. IT HAS ALSO BEEN HELD THAT THE FACT THAT THE LIQUIDATED DAMAGES MAY EQUAL OR EXCEED THE CONTRACT PRICE IS NOT DETERMINATIVE OF WHETHER A LIQUIDATED DAMAGE PROVISION IS ENFORCEABLE. 36 COMP. GEN. 143. HOWEVER, THERE MAY BE OTHER FACTORS WHICH WOULD WEIGH MORE HEAVILY TOWARD A DIFFERENT CONCLUSION, AND IN VIEW OF OUR ANSWER TO THE THIRD QUESTION NO ANSWER TO THIS IS REQUIRED IN THIS INSTANCE.

AS TO WHETHER THE DOCTRINE OF "SUBSTANTIAL COMPLETION" MAY BE INVOKED TO PRECLUDE ASSESSMENT OF LIQUIDATED DAMAGES, THE FACT THAT 98PERCENT OF THE SPRINKLERS HAD BEEN INSTALLED AND THE ENTIRE SYSTEM IN THE LARGER AREA COMPLETED BY THE CONTRACT COMPLETION DATE, AND THE FURTHER FACT THAT THE ONLY ITEM REMAINING TO BE INSTALLED WAS ONE WHICH WAS NOT ESSENTIAL TO THE FUNCTIONING OF THE FIRE EXTINGUISHING FEATURE OF THE INSTALLATION, APPEAR TO JUSTIFY THE CONCLUSION THAT THE CONTRACTOR HAD RENDERED SUBSTANTIAL PERFORMANCE. ALSO, THERE IS NO INDICATION THAT THE FAILURE TO TIMELY INSTALL THE ALARM TRANSMITTER ON THE PARTIAL SYSTEM OF ONLY 3 SPRINKLERS, A MINOR DEVIATION AT MOST, WAS ATTRIBUTABLE TO ANY WILLFUL OR DELIBERATE CONDUCT ON THE PART OF THE CONTRACTOR, ALTHOUGH HE MAY HAVE BEEN NEGLIGENT IN PLACING AN ERRONEOUS ORDER. ACCORDINGLY, WE CONCLUDE THAT UNDER THE DOCTRINE OF SUBSTANTIAL PERFORMANCE, LIQUIDATED DAMAGES ARE NOT PROPERLY FOR ASSESSMENT. B-142947, JUNE 16, 1960; CONTINENTAL ILLINOIS NATIONAL BANK, ET AL. V. UNITED STATES, 121 CT.CL. 203, 243 (1952), 101 F.SUPP. 755, CERTIORARI DENIED 343 U.S. 963. THE THIRD QUESTION, THEREFORE, IS ANSWERED IN THE AFFIRMATIVE.