A
contract is meant to outline the scope of work, obligations, allocation of
risk, and legal rights of both parties on a construction project. We have all heard the occasional story of a contractor
that promises to have work complete by a date certain but does not show up very
often and ends up completing the project late.
The consequences for failing to effectively manage a construction
project, however, can be significant and costly.
A
properly prepared contract will address the issue of damages when there are
delays on a project. There are various
means of addressing the issue of late completion and the allocation of damages
for failing to meet a substantial completion date. In particular, one way is to limit the amount
of damages for breach of contract.
In
construction contracts it is common to include a waiver of consequential
damages provision. Consequential damages
are damages that result indirectly from the act that amounts to a breach of
contract. Depending on the
circumstances, lost profits can be considered consequential damages that are
recoverable. Even where the parties
attempt to waive consequential damages, such damages still may be recoverable
depending on the wording of the contract.
The actions of the parties during the performance of the project can make
a difference.
The
issue of a contractor’s responsibility for managing a construction project and
failing to meet its substantial completion date was recently addressed in the 2nd
District Court of Appeals, Case Nos. 28767, 28768, 2021-Ohio-13 (the “Tavern
Case”).
Case Facts
In
the Tavern Case, an owner of a tavern hired a contractor to remodel a property
for a new tavern. The owner conveyed to
the contractor on multiple occasions that the work needed to be complete prior
to the fall holiday season because of the amount of business expected during
this period. The contractor made
promises that it could meet the owner’s schedule for project completion.
During
the work, the owner made multiple payments to the contractor for work related
to design, supplies, and demolition.
Near the time demolition began, however, the representative for the
contractor took a vacation and work did not progress. Notably, the contractor had not submitted the
plans for permitting or coordinated this to be done in his absence. The owner submitted the plans. The owner also expressed concern that work
was not getting done and, when the owner performed site visits, crews were not
working.
By
October, it was clear the work would not be completed on time. The parties to the contract executed a change
order to extend the substantial completion date to early December.
The
contractor failed to progress the work to meet the new substantial completion
date set for early December. Notably,
the contractor took another extended vacation over Thanksgiving. The owner attempted to contact the contractor
because work was not progressing, but the contractor was unresponsive to
texts. By the early December substantial
completion date, the work was such that dry wall was not installed and the
electrical and plumbing work was only roughed in.
The
project was eventually completed, but well past the substantial completion date.
The
parties both filed various claims against each other related to the
Project. The contractor was seeking
payment for amounts it alleged was owed.
The owner generally sought damages related to the late completion. The trial court held that the owner did
indeed owe the contractor for costs related to work performed outside of the
contract. But the court also held that
the contractor breached the contract by failing to meet the substantial completion
date and did so in a reckless manner, which opened the door to the contractor’s
responsibility for consequential damages, including the award of lost profits.
Both
parties appealed. The contractor argued
that it did not breach the contract because the owner was responsible for
delays at the beginning of the project and the contractor was substantially
complete by the substantial completion date. The contractor further argued that it did not
perform in a reckless manner as it acted diligently and was hampered by the
owner’s early delays. Moreover, the
contractor argued that even if there was a breach of contract due to late
completion, there was a waiver of consequential damages provision in the
contract and the owner should not be entitled to lost profits.
Delay When Time is
of the Essence
The
trial court determined that time was of the essence for the completion of the
project based on the sense of urgency conveyed by the owner to the
contractor. As to why the project was
not completed on time, there appeared to be finger-pointing as to who was
responsible for delay in the beginning of the project with allegations by the
contractor that the owner was responsible for various delays. The Court, however, did not lend credence to
claims that the owner caused delay and did not go into detail on these issues
because the parties executed a change order after these alleged events to move
the substantial completion date to early December.
The
Court of Appeals agreed stating that time was of the essence in this contract
because the contractor was aware of the pressing need to open the tavern before
the holidays, the suspension of the owner’s rental payments based on a
September opening, and the contractor was aware that there was much work
remaining at the time of the change order.
As
to whether the contractor was substantially complete by the December
substantial completion date, the Court looked to a statutory definition of
substantial completion, case law and the evidence at trial to conclude that there
was clearly a significant amount of work remaining on the December substantial
completion date and the work was not completed until February.
Indifference as
Recklessness
In
response to the contractor’s argument that it was not reckless, the Court
examined Ohio law as it relates to reckless conduct. The Court cited to a Supreme Court case
providing that “[r]eckless conduct is characterized by the conscious disregard
of or indifference to a known or obvious risk of harm to another that is
unreasonable under the circumstances and is substantially greater than negligent
conduct.”
The
Court found that there was credible evidence that the actions of the contractor
rose to this level. The trial court
stated that the contractor “failed to substantially complete the work owing
entirely to [the contractor representative’s] cavalier and reckless failure to
do so, thereby violating the contract’s express provisions…” The Court agreed, stating the contractor “was
aware well before signing the contract that opening the bar quickly was very
significant, and he agreed to a time-frame that he then consciously disregarded
by going on vacation and by failing to have competent personnel performing the work
in his absence.”
The Exceptions
to a Waiver of Consequential Damages
To
avoid the award of lost profits, the contractor pointed to a contract provision
that prohibited consequential damages.
That provision, however, provided exceptions to the waiver of
consequential damages. The provision
provided an exception for liability that arose from willful or reckless
actions. The Court took no issue with
the credibility or the methodology used by the accountant testifying as to the
lost profits. The Court, however, again
emphasized that taking vacations without having competent personnel available
to manage the project, and continuing to promise completion with knowledge of
the urgency for project completion was considered reckless and, therefore, within
the exception to permit the award of lost profits as consequential damages.
Conclusion
The issues in this case were many, but there are two takeaways. The language in the contract matters. It is common for contracts to contain limitations and exceptions in the various provisions, and these should not be taken for granted. In addition, both owners and contractors must be attentive and responsive to ensure that progress is maintained for the timely completion of any project.
