May 22nd. The Kansas Supreme Court has issued its opinion in the case of Carrothers Construction Company v. City of South Hutchinson (No. 98,023), a contract dispute concerning liquidated damages. In a unanimous opinion, written by Justice Daniel Biles, the Court held that the construction company was required to lose $140,000 of its fees for delays in the completion of a new sewage plant. In doing so, the Court settled a previously undecided question of Kansas law, ruling that liquidated damages should be reviewed based upon the circumstances at the time of the contract and not taking into account a retrospective assessment of the actual damages incurred to a party.
The background to the case was that the City of South Hutchinson hired Carrothers Construction Company to build a new sewage treatment plant, which incorporated a computer control system. MKEC Engineering Consultants were appointed as Project Engineer and one of their responsibilities was to certify stages of completion, which in turn would trigger liquidated damages at $850 per day of delay if those stages were not met. Both the city and the construction company agreed to the terms of the contract. The treatment plant should have been completed in July of 2003. It wasn’t. In November of that year the City was able to start operating it manually (without the computer system). The project was finally completed in January 2004. Based on this, MKEC advised the City to withhold $140,000, per the contract. Carrothers then sued the City for breach of contract. Carrothers lost in the District Court and the Court of Appeals, which brought the case to the Kansas Supreme Court.
The terms of the contract defined two stages of completion – substantial (when the plant would be operational) and final (when there was nothing left to do). As certified by MKEC, these two stages were met one day apart, the former when the computer control system was finally operational and the second when the manuals to the same were delivered. Carrothers argued that the former was actually met when the City began operating the plant in November 2003. The Court rejected this argument, noting that the contract explicitly included the control system as part of the work and that the Carrothers had agreed to delegate decisions as to completeness to the project engineer.
Carrothers also argued that the liquidated damages should be reviewed for reasonableness in court both prospectively (from the viewpoint of the parties at the time the contract was signed) and retrospectively (after the fact, based on whether the dollar amounts approximated to the actual damages incurred). Carrothers argued that the 10th Circuit Court of Appeals had construed Kansas Law this way in another case, but the Court rejected this and held that the 10th Circuit had in fact found that the issue was not decided. This question was therefore an open question of law and so the Kansas Supreme Court held that in Kansas the analysis in Court of liquidated damages is only based on a prospective assessment. Doing so, the Court stated, was beneficial since it encouraged the use of liquidated damages (instead of tort litigation) and left parties free to agree contracts with one another to handle these issues.
The Court also rejected two arguments from Carrothers, that the $850 per diem damage amount was unreasonably high and that the City waived its right to the liquidated damages by occupying the facility; again holding that it was not the Court’s function to rewrite the contract after the fact.