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Force Majeure Clause Does Not Shield Contractor from Delays Caused by Its Own Supplier, U.S. Court Holds
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August 10, 2009
Howrey LLP
A federal appeals court has held that a force majeure clause did not relieve a contractor of its responsibility to the owner for delays caused by a supplier and that it was proper to apportion liquidated damages based on fault.
Hutton Contracting Company, Inc. contracted with the City of Coffeyville, Kansas, to construct a power line and fiber-optic line for $1,131,947.12. The contract provided for completion within 45 days of the start of work (excluding Sundays and bad weather days). The contract imposed $500 a day liquidated damages for late completion.
The contract contained a force majeure clause that allowed Hutton more time to complete the project if exceptional circumstances (such as acts of God, floods, fires, and acts or omissions of the city in matters for which the city was solely responsible) occurred so long as Hutton was not at fault and they were beyond Hutton’s control. Hutton was required to request a time extension within 10 days of the event.
At a preconstruction conference on August 4, 2000, the city set a commencement date of August 9, 2000. Hutton contended that the city acted arbitrarily. Four days later, Hutton requested that the commencement date be moved back to October 23, 2000, because only by then would it have sufficient steel utility poles to start work.
The city’s engineer granted the request on condition that the project be completed within 45 days of the revised commencement date.
In November, Hutton noticed that some of the poles delivered were defective and requested a 30-day time extension to obtain replacement poles. Hutton also submitted time extension requests for bad weather. None were granted.
In addition, there was disagreement between the parties on when the project actually was completed. The lines were ready for use on March 22, 2001, but the city did not consider the project fully complete until July 9, 2002.
Upon completion of the project, the city refused to pay Hutton the contract retention of $110,159.47, claiming that it was entitled to retain the funds as liquidated damages for Hutton’s delays. Hutton sued the city for the contract balance, alleging that the force majeure clause shielded it from liability for delays caused by the supplier and that the city breached its duty of good faith and fair dealing by not granting requested time extensions.
The U.S. District Court resolved several issues before sending the case to a jury. The court determined that the contract’s force majeure clause did not excuse Hutton for delays caused by late delivery of the steel poles from its supplier. The court held that Hutton’s problems with its supplier were partially its own fault because Hutton made the conscious decision to contract with that particular supplier and assumed the risk that the supplier would perform.
The court also held that the liquidated damages clause allowed the court to apportion delays between Hutton and the city.
The jury then determined that Hutton was responsible for 171 days of damages. The jury also concluded that the city had breached its duty of good faith and fair dealing and was solely responsible for 23 days of delay. The District Court awarded Hutton $24,659.47, representing retention of $110,159.47 less $85,500 in liquidated damages for (171 days of delay at $500 a day).
Hutton appealed, and the 10th U.S. Circuit Court of Appeals affirmed. Hutton Contracting Co., Inc. v. City of Coffeyville, 487 F.3d 772 (10th Cir. 2007).
The appeals court rejected Hutton’s contention that it should have been excused for delays that resulted from its supplier’s inability to deliver products of proper quality on a timely basis. Hutton argued that delays caused by its suppliers or subcontractors were not its fault and were beyond its control and, therefore, should be excused. The court held that a delay caused by a supplier or subcontractor is not a force majeure. Rather, it concluded, Hutton was responsible to the city for its supplier’s delays when those delays were not themselves excused by a force majeure because Hutton made the determination to delegate its responsibilities to the supplier. The court held that a contractor assumes the risk that its supplier or subcontractor will fail, at least when the contract does not specify the supplier or subcontractor. Otherwise, the court wrote, a contractor would have “a perverse incentive” to subcontract work in order to be shielded from liability to its own customer.
The appeals court also affirmed the lower court’s decision to apportion delay in awarding liquidated damages. Hutton argued that because the jury held the city responsible for 23 days of delay, Hutton was shielded from imposition of any liquidated damages because they could not be apportioned. The appeals court rejected Hutton’s argument, noting that Hutton relied on old cases. The appeals court concluded that its “review of decisions during the past 30 years shows that a strong majority adopt our view.” It noted that “[a]pportionment of damages based on fault comports with modern notions of fairness, as reflected, for example, in the near-universal adoption of comparative responsibility in tort actions.”
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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