OP-ED: A State Transportation Agency's Big Victory in Legal Battle
Daily Journal of Commerce
On Dec. 13, a Thurston County jury awarded $57.2 million in liquidated damages to the Washington State Department of Transportation (WSDOT) to be paid by Seattle Tunnel Partners (STP), while denying STP’s $480 million counterclaim for delay damages.
The claim arose when the massive boring machine – “Big Bertha” – shut down unexpectedly during the State Route 99 tunnel project in Seattle. The machine hit a steel pipe after boring only 1,000 feet of the 1.2-mile-long tunnel under the waterfront.
STP (a joint venture between New York City-based Dragados USA and Los Angeles-based Tutor Perini Corp.) claimed that the steel pipe was an unforeseen site condition that damaged Big Bertha, resulting in a delay of nearly three years. WSDOT claimed that the delay was mostly caused by Big Bertha’s poor design.
Ultimately, the jury agreed with WSDOT and awarded it damages for the project schedule delay exceeding 730 days. STP had been granted some additional contract time during the work delay, but 730 days remained unexcused.
STP has been embroiled in this battle with WSDOT since 2015, when the agency initially filed the lawsuit for breach of contract relating to the tunneling stoppage that occurred in 2013. The primary issue was whether STP’s delay in completing the project was an excusable one caused by a differing site condition – the steel pipe. After the parties spent four years litigating, a jury determined that STP’s delay was not excusable and that it was liable for liquidated damages associated with the delay.
While STP will likely appeal the jury’s verdict, it is fighting an uphill battle. Even good appeals have only a 30 percent chance of overturning the decision at the trial court. Verdicts like these should serve as a reminder to contractors, subcontractors and designers that litigation can be unpredictable and costly. The verdict should also remind us to pay close attention to some of the key contract provisions relating to unforeseen site conditions and delays.
The unforeseen site conditions clause
Contractors should always ensure that they have an unforeseen site conditions clause (including physical subsurface conditions) included in their contracts. Unless there is a contract provision allocating otherwise, the general contractor bears the risk of costs and impact related to an unforeseen subsurface condition – many contractors do not realize this risk. While many public contracts contain an unforeseen site conditions clause, most private contracts do not.
There are many large private projects happening in the Pacific Northwest that likely do not contain an unforeseen site conditions clause. Thus, if a general contractor is working under a contract without an unforeseen site conditions clause and, for example, uncovers a large underground oil tank that was not disclosed on the drawings or as part of the geotechnical report, the general contractor could be on the hook to pay not only for the costs to remove the tank, but also for the impacts associated with the delay. As you can imagine, the environmental impact alone in this example would be substantial. In STP’s case, there was an issue as to whether Big Bertha’s breakdown and the ultimate project delay were actually caused by an unforeseen site condition. If STP had proved that the sole cause of delay was the steel pipe as an unforeseen site condition, WSDOT would have likely been on the hook for the cost and impact of the delay because of the unforeseen site conditions clause.
The consequential and liquidated damages clause
Most contracts, public and private, contain a waiver of “consequential” damages, while specifying “liquidated” damages for delay. Consequential damages are those indirect damages to one party caused by the other party’s breach of contract. For example, if a contractor is late delivering a casino, the contractor could be on the hook to pay for the lost profits that the casino owner could have made had the casino opened on time. In this example, the contractor would likely want the owner to waive consequential damages.
Liquidated damages are to compensate one party (usually the project owner) for the actual damages that it incurs as a result of the delay. Providing for liquidated damages (in lieu of unknown, indirect damages) is a good option for both owners and contractors on many projects.
Liquidated damages clauses should clearly define when the damages will begin to apply. The parties should always agree upon the project schedule (showing the project’s critical path) and clearly state the assumptions supporting the durations and contract time.
The amount of liquidated damages should also be reasonable. Liquidated damages are not a penalty but are intended to compensate a party for its actual damages associated with the delay, including financing costs, overhead, etc. The rate should be specifically negotiated and agreed to. The clause should also provide that it is the exclusive remedy for delay.
Notably, without a liquidated damages provision, STP could have been on the hook for a lot more than $57.2 million. Consider all of the potential indirect costs – lost profits from tolling, WSDOT’s administrative costs for 730 days, etc. WSDOT’s consequential damages could have easily eclipsed the liquidated damages that it was ultimately awarded. A liquidated damages clause provides a known risk to the contractor.
Be sure to consult your attorney if you’re planning to propose any changes to the provisions of your contract so that he or she can evaluate the overall impact to the contract. Additionally, it is never a bad idea to have an attorney review your contracts every couple of years to ensure that they are up to date with the ever-changing law and evaluate any exposure that your company might be facing.
Column first appeared in the Oregon Daily Journal of Commerce on December 23, 2019.