Articles
Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Substantial completion and liquidated damages: A road not taken

Substantial completion dates frequently coincide with liquidated damages provisions in construction contracts; a contractor’s failure to meet the deadline set by the former can prompt the enforcement of the latter.1 Both substantial completion and liquidated damages provisions can spawn litigation, but despite their connection, Minnesota case law examining liquidated damages provisions when substantial completion is in dispute is surprisingly thin. 

This article first briefly examines substantial completion dates and their relation to liquidated damages provisions. Second, it proposes that by placing substantial completion at issue in litigation, contractors may take advantage of a relatively untraveled avenue in preventing the assessment of liquidated damages.

Substantial completion

Substantial completion is a significant milestone under most construction contracts.2 “As a general rule, substantial completion is defined as that point in the construction where the work is sufficiently complete that the owner may occupy or utilize the work for the use for which it was intended.” What actually constitutes substantial completion depends almost entirely on the circumstances surrounding a particular construction project. This reality often leads parties to specifically define substantial completion in their contracts.3 Evidence of substantial completion includes the issuance of a certificate of occupancy or design-professional approval, but such evidence is not determinative.4

A substantial completion date serves a variety of purposes, implicating both present and future legal consequences.5 For example, the substantial completion date can trigger statutes of repose, support breach of contract actions, and cause major payments to contractors to become due.6 Substantial completion dates—or rather, the failure to meet them—can also trigger negative incentives as well, namely liquidated damages provisions.7 

Liquidated damages

Liquidated damages represent a prior agreed-upon measure of damages and a fixed sum payable to a party when actual damages are difficult to ascertain or prove in the event of a breach.8 Owners concerned with timeliness and risks associated with completion delay are attracted to liquidated damages provisions.9
Owners opt for liquidated damages because they obviate the need for the nonbreaching party to prove actual damages upon breach.10 Under Minnesota law, liquidated damages provisions are presumed valid.11 Nevertheless, contractors challenge their enforceability as unreasonable penalties, and such provisions cannot be designed to create windfalls for owners.12 

Generally, a significant consequence of achieving substantial completion under a construction contract is that the owner is no longer entitled to assess liquidated damages.13 In limited situations, a breaching party may argue it achieved substantial completion, preventing the enforcement of a liquidated damages provision tied to substantial completion. Because substantial completion must be at issue in addition to the assessment of liquidated damages, though, litigation addressing this argument specifically is uncommon.14 For a thorough discussion of this argument, practitioners must venture outside Minnesota. 

An Illinois case, Stone v. City of Arcola, provides such an example.15 In Stone, a court upheld a trial court determination that a sewage treatment facility was substantially complete nearly a year prior to the issuance of a substantial completion certificate, despite unfinished chlorine and alum systems.16

Because the sewage facility had been operational in the interim period, the contractor prevailed, and the court halted liquidated damages accordingly. Stone is interesting because although the court upheld the trial court’s findings as to the date of substantial completion, it overturned the trial court’s holding regarding the enforceability of the liquidated damages clause. The liquidated damages were enforceable, but limited by the substantial completion date.

Relying on the same principles as Stone, a Minnesota court should reach the same holding in a similar case. In Minnesota, courts are willing to use substantial completion to prevent the assessment of liquidated damages, but Minnesota litigants have yet to present a case where the argument is fully elaborated.17 

In addition to attacking liquidated damages provisions as unenforceable, contractors seeking to prevent the assessment of liquidated damages provisions can expand their potential for success by placing the substantial completion date at issue. Certainly, from an owner’s perspective, artful contract drafting can mitigate the risk that substantial completion is litigated. But, in a fast-paced and high-pressure industry like construction, the realities on the ground do not always mirror the plans. When the right facts arrive, placing the date of substantial completion at issue to prevent the assessment of liquidated damages could yield success for contractors in Minnesota.

ISAK HAWKINSON is a 3L at the University of Minnesota Law School. This article was the winner of the MSBA Construction Law Section’s 2nd annual student writing competition. 

 

Notes

1 Barry B. Bramble & Michael T. Callahan, Construction Delay Claims §2.04 (6th ed. 2018).

2 3 Philip L. Bruner & Patrick J. O’Connor Jr., Bruner & O’Connor Construction Law §8:23 (2018).

3 Id.; e.g., “When CONTRACTOR considers the entire Work ready for its intended use, CONTRACTOR shall notify COUNCIL in writing that the entire Work is substantially complete (except for items specifically listed by CONTRACTOR as incomplete) and request that COUNCIL issue a certificate of Substantial Completion. Within a reasonable time thereafter, COUNCIL, CONTRACTOR, and A/E shall make an inspection of the Work to determine the status of completion. If COUNCIL does not consider the Work substantially complete, COUNCIL will notify CONTRACTOR in writing giving the reasons therefor. If COUNCIL considers the Work substantially complete, COUNCIL will notify CONTRACTOR in writing and shall fix the date of Substantial Completion. There shall be attached to the notice a tentative list of items to be completed or corrected before final payment.” Frontier Pipeline, LLC v Metropolitan Council, No. 62-CV-08-2263, 2009 WL 5454450 (Minn. Dist. Ct. 11/19/2009).

4 Bramble, supra; 3 Bruner & O’Connor, supra §8:23; see also Stone v. City of Arcola, 536 N.E.2d 1329 (Ill. App. 1989).

5 Bramble, supra.

6 Minn. Stat. §541.051; Ross v. Hallmark Homes of Minneapolis, Inc. 843 N.W.2d 798, 802 (Minn. Ct. App. 2014) (discussing certificates of occupancy in relation to substantial completion and Minnesota’s statute of repose); Bramble, supra.

7 3 Philip L. Bruner & Patrick J. O’Connor Jr., Bruner & O’Connor Construction Law §8:26 (2018); Bramble, supra.

8 In re Qwest’s Wholesale Serv. Quality Standards, 702 N.W.2d 246, 262 (Minn. 2005).

9 2 Philip L. Bruner & Patrick J. O’Connor Jr., Bruner & O’Connor Construction Law §7:196 (2018).

10 Id.

11 In re Bowles Sub Parcel A, LLC, 792 F.3d 897, 901 (8th Cir. 2015) (citing Gorco Constr. Co. v. Stein, 99 N.W.2d 69, 74 (Minn. 1959)).

12 Minnesota courts have employed the Restatement of Contracts §339 (1932) to determine if a liquidated damages provision is valid or an impermissible penalty. This test provides, “(1) An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless (a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and (b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.” See Gorco Const. Co. v. Stein, 256 Minn. 476, 482, 99 N.W.2d 69, 74–75 (1959) (discussing reasonableness of liquidated damages) and more recently, Schmit Towing, Inc. v. Frovik, No. A12-0989, 2012 WL 6652637, at *3 (Minn. Ct. App. 12/24/2012) for its application.

13 3 Bruner & O’Connor, supra §8:26.

14 See 7 Philip L. Bruner & Patrick J. O’Connor Jr., Bruner & O’Connor Construction Law § 21:3 (2018). Perhaps many issues surrounding substantial completion are resolved in ADR. Over the last two decades traditional arbitration has begun to fall out of favor with the construction industry, but it currently remains the dominant dispute resolution process in the field. Id. 

15 Stone v. City of Arcola, 536 N.E.2d 1329 (Ill. App. 1989).

16 Id. at 1338.

17 Johnson Bros. Corp. v. Rapidan Redevelopment Ltd. P’ship, 423 N.W.2d 725, n.2 (Minn. Ct. App. 1988) (addressing in a footnote that a dispute exists regarding substantial completion, but it is not a genuine issue on appeal); Lunda Const. Co. v County of Anoka, No. 02-CV-17-244, 2018 WL 3309037, at *7 (Minn. Dist. Ct. 2/2/2018) (rejecting that the project had been substantially completed and liquidated damages could not be assessed).

Leave a Reply

Articles by Issue

Articles by Subject