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Trashing "Ask A Professor"


Guest Vern Edwards

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Guest Vern Edwards

In this era of the trainee, answering questions is an important responsibility. It's been a while since I have looked at "Ask A Professor" and I feel that I have been remiss in the performance of my duties. Here we go:

Liquidated Damages and Cumulative Amount

Posted to Architect-Engineer and Construction Contracting on 1/13/2010 12:00:00 AM

The Scenario—

Construction contracting...dealing with excessive LD amounts (saw a TO that had 90% of the total TO amount taken away with LDs). I feel that anymore than a cumulative amount of...say 25% is punitive in nature.

The Question—

Is there anything like a GAO decision or court case that would back up my gut feeling/claim that there s a certain point where the cumulative amount of LDs gets to be punitive?

The Answer--

FAR Subpart 11.5 provides guidance on when and how liquidated damages (LDs) clauses are to be used as well as the general policy in using such clauses. LDs are used to compensate the Government for probable damages, and the LD rate must be based on a reasonable forecast of such damages. LDs cannot be punitive.

A maximum amount or time period should be included if the maximum probable damage to the Government is limited. If a contract does not contain a time limit or maximum amount if LDs, it is not considered unreasonable or a penalty (Hughes Bros. v. U.S., 133 Ct. Cl 109, 134 F. Supp. 471 (1955)). LDs have been assessed in excess of the contract price, though such an assessment has been determined to constitute a penalty (Operational Serv. Corp., ASBCA 37059, 93-3 BCA, Para. 26,190).

LDs cannot be assessed during any period in which the contractor experienced an excusable delay, or after the date on which the contractor substantially completed the work. If the assessment of LDs is warranted, the contracting officer is required to take all reasonable steps to mitigate them. Such steps may include termination of the contract and reprocurement or expeditiously obtaining performance from the contractor to prevent excessive loss to the contractor and to protect the interests of the Government.

Under Treasury Order 145-10 (see also 41 U.S.C. Section 256a and 10 U.S.C. Section 2312), the head of the agency may reduce or waive the amount of LDs assessed under a contract if approved by the Commissioner, Financial Management Service or designee. The contractor bears the burden of persuading the Government that the reasons for delay merit such a remission, and remission is not allowed to rescue the contractor from the consequences of its own negligence or carelessness. However, remission would be appropriate if damages are an unforeseeable consequence of a delay, or where the Government played a substantial role in the delay. The remission may also be conditional upon certain actions of the contractor, such as reducing or eliminating pending claims.

Critique:

The question was whether there is case law bearing on when the amount of liquidated damages is punitive instead of compensatory and, therefore, not enforceable. Only the first two paragraphs of the four-paragraph answer are responsive, and only minimally so.

Our Answer:

There is a substantial amount of case law bearing on the question of when the amount of liquidated damages is punitive instead of compensatory and, therefore, not enforceable. Rather than cite particular cases, I'll refer you to Administration of Government Contracts, 4th ed. (2006), by Cibinic, Nash, and Nagle, pp. 1027 - 1036. That discussion is comprehensive and cites numerous board and court decisions.

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PS, In the event that this post is aimed at anyone in particular, I haven't been the "Professor" for Construction and A/E Contracts for over 2 1/2 years. Despite my repeated requests, AAP wouldn't remove my organization from the "Who Answers These Questions?" page until they finally deleted (I think) the page.

I occasionally provide feedback to AAP when I strongly disagree with an answer. The only way to do that is to submit a "question", referring to the question number that appears in the URL line of the specific page. I think I have aggravated them to the extent that they ignore me.

By the way, if you want to be the "professor" for a topic, you can constantly bug them about their answers until they ask you if you'd like to be the "prof". That's what happened to me. I got tired of the Navy person's answers to the questions back in 2001.

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Guest Vern Edwards
PS, In the event that this post is aimed at anyone in particular, I haven't been the "Professor" for Construction and A/E Contracts for over 2 1/2 years. Despite my repeated requests, AAP wouldn't remove my organization from the "Who Answers These Questions?" page until they finally deleted (I think) the page.

I occasionally provide feedback to AAP when I strongly disagree with an answer. The only way to do that is to submit a "question", referring to the question number that appears in the URL line of the specific page. I think I have aggravated them to the extent that they ignore me.

By the way, if you want to be the "professor" for a topic, you can constantly bug them about their answers until they ask you if you'd like to be the "prof". That's what happened to me. I got tired of the Navy person's answers to the questions back in 2001.

I wasn't aiming at you Joel. I didn't notice who wrote it. If you wrote it, I'm sorry. It was not my intention.

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Naw, as I explained above,it wasn't me. I try to keep up as time permits and send feedback when I disagree.

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  • 4 weeks later...

Vern I would recommend other references in addition to the cibinic and nash books such as federal contract management (BTW your name has been cited in this references several times) and government contracts administration and procedure.

Anyhow, here is my attempt to copy and paste more relevant sections, unlike the DAU professor attempt, to answer the poster?s question

Edited excerpt from FCM

While liquidated damages are not a disfavored method for the Government's control of contract performance, they will only be enforced where they represent a reasonable approximation of the actual damages that would otherwise be sustained.

The test of reasonableness is applied as of the time of contract formation, not as of the time of delay suffered. The parties' projection of what damages might be subsequently experienced governs. Thus, even when the Government suffers no actual damages from a delay, assessment of liquidated damages will be considered reasonable and will be enforced, if the parties (when the contract was formed) reasonably projected that damages might result from delay.

When the stipulated damages bear no relationship to damages that could reasonably be expected as a result of delayed performance, the provision will considered a "penalty," and enforcement should be denied.

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Guest Vern Edwards

I'm not familiar with that book. It would be helpful if you could provide the author, publisher, and date of the book. Is Federal Contract Management the complete title? If possible, provide the ISBN. The questioner asked for case law. Does the book provide case law citations?

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I'm not familiar with that book. It would be helpful if you could provide the author, publisher, and date of the book. Is Federal Contract Management the complete title? If possible, provide the ISBN. The questioner asked for case law. Does the book provide case law citations?

http://www.lexisnexis.com/store/catalog/bo...mp;prodId=10377

Hello, see above link for requested information. This reference provides case law in addition to secondary materials.

FYI, this reference is relatively expensive, but your legal staff may have access to Lexis Nexis.

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