LAW: The Contractor's Side

Contractor needs to set specific limits

Article December 28, 2000
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I have written several columns on risk shifting in “design-build” contracts. Last month, I wrote about a case where the design-build contractor had limited its liability. This month, I want to alert readers to a case where the design-builder did not limit its liability.
Plaintiffs Cogen Energy Technology, L.P., (Cogen) and Royal Insurance Co. of America (Royal), sued CNF Constructors Inc., (CNF) seeking “consequential” damages for a temporary operating shutdown caused when a steam turbine generator (STG) failed in a power plant designed and constructed by CNF for Cogen.

Cogen and CNF entered into a design-build contract (the “agreement”) requiring CNF to construct a combined-cycle cogeneration facility (the “plant”). A central feature of the agreement, and to the operation of the plant, was the installation of the STG. As is typical in projects of this type, the parties structured the agreement to allow Cogen to go online and sell energy commercially before the plant was completed. To balance Cogen’s need to have an increasingly operational and efficient plant and CNF’s need to have the flexibility necessary in a complicated construction project, the parties agreed on interim performance tests to measure the rate of completion. At each stage, CNF was required to demonstrate that the plant met certain performance criteria and, if so, Cogen was required to certify completion of that stage.

A “catastrophic failure”

On March 28, 1992, Cogen granted provisional acceptance. Three days later, the STG “experienced a catastrophic failure” requiring complete shutdown of the plant for three months while CNF repaired the STG. During this time, Cogen was unable to sell energy to its customer, Niagra Mohawk Power Co. CNF repaired the STG and Cogen certified final acceptance within the time allowed under the agreement.

CNF conceded, for purposes of its motion for summary judgment alone, that the shutdown was “due to defects in the design and/or materials and/or workmanship and/or installation of said generator.”

CNF argued that within industry custom and/or under the terms of the agreement, 1) CNF did not breach the agreement because the defect was repaired prior to final acceptance; and, 2) that Cogen’s remedy for a breach of warranty is expressly limited to replace and repair, and does not include consequential damages; or 3) the liquidated damages provision precludes any recovery for consequential damages.

CNF first argued that it never breached the agreement because the plant met each of the four interim performance criteria. The parties agreed for purposes of CNF’s motion that CNF met each of the four stage tests in a timely manner. Under the plain meaning of the agreement CNF, therefore, fully performed.

Nevertheless, CNF conceded that the failure breached the warranty attaching to each component part after such part is placed in commercial operation. CNF argued that it complied with the “special” remedy provision in Paragraph 16.1 that required CNF to repair or replace the defective part. CNF went further, arguing that because the contract remedy did not expressly include consequential damages, they were excluded.

Court overrules

The court disagreed, stating that under New York law to limit a party’s right to consequential damages the parties must do so expressly in the contract. Because the design-build contract made no limitation on the available remedies, Cogen’s rights to consequential damages was preserved.

Finally, CNF argued that the liquidated damages provisions (Paragraphs 22.1.1 and 22.1.2) precluded recovery for consequential damages. However, the court found neither provision applicable. Paragraph 22.1.1 applied if CNF did not achieve substantial completion, provisional acceptance or final acceptance by April 2, 1992. Paragraph 22.1.2 applied if CNF achieved substantial completion, but neither provisional acceptance or final acceptance by April 2, 1992. The parties agreed that CNF satisfied both of these performance guarantees. The court concluded that the liquidated damages provisions were included to cover the possibility of a delayed opening, not for an interim shutdown caused by the temporary failure of a component part.

If design-build contractors want to exclude or limit “consequential damages” they need to specifically do so in the design-build contract.

Workshops for contractors

In November, Jenkens & Gilchrist will offer three workshops for contractors on the legal aspects of design-build contracts. The first will be Nov. 3 in Atlanta, the second will be on Nov. 9 in Los Angeles and the third will be on Nov. 16 in Chicago.

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