Opinion ID: 1910081
Heading Depth: 1
Heading Rank: 5

Heading: Was it a mistake to award damages for lost profits after the date when the project was substantially completed?

Text: Perini argues that if the award of lost profits from September through December 1984 is allowed to stand, the well-established rule that limits damages after substantial completion will be violated because the parties agreed that substantial completion of the project occurred on September 15, 1984. Substantial completion has a definite meaning in the construction industry. Amicus, Associated General Contractors of America (AGCA), tells us that the contract entered into by Perini and Sands is substantially the same as AGCA Document No. 500, which in turn is modeled on forms distributed by the American Institute of Architects (AIA). Those AIA forms are widely used in the construction industry. Justin Sweet, Sweet on Construction Industry Contracts: Major AIA Documents § 1.1 (1987) (hereinafter Sweet). The definition of substantial completion that appears in the contract reads as follows: The date of [s]ubstantial [c]ompletion of the [p]roject or a designated portion thereof is the date when construction is significantly complete in accordance with the [d]rawings and [s]pecifications so the [o]wner can occupy or utilize the [p]roject or designated portion thereof for the use for which it is intended. According to Professor Sweet, the AIA defines substantial completion as what the owner bargains for, a mostly completed project within the required time. Sweet, supra, § 16.15. Professor Sweet also notes that generally AIA contracts contain a clause that requires a contractor, on substantial completion, to submit a comprehensive list of items to be completed or corrected. That is generally known as a punch list. Ibid. Although the specific clause described by Professor Sweet was not included in the contract here, the definition of punch list and its link to substantial completion will be helpful to our analysis. Generally, the punch list includes those items that restrict the final completion of the project. 2 Steven G.M. Stein, Construction Law ¶ 7.09 at 7-78 (1991) (hereinafter Stein). Another factor that is indicative of substantial completion is the issuance of a certificate of occupancy by the municipality, normally by its building department. Id. at 7-77. When an owner attempts to assess liquidated damages, a certificate of occupancy should arguably determine the date of substantial completion. Ibid. In its amicus brief, AGCA argues that substantial completion in construction law and the common-law doctrine of substantial performance are different, without clearly stating the consequence of that purported difference. It appears that substantial completion is a term used in the construction industry to measure the time commitment portion of the contract. Sweet, supra, § 17.4. In any case, the definition of substantial completion used by the parties is similar to the definition of substantial performance used by the courts. See Jardine Estates, Inc. v. Donna Brook Corp., 42 N.J. Super. 332, 337, 126 A. 2d 372 (App.Div. 1956). Perini in its papers and the case law use the terms interchangeably. Construction-industry authorities agree that the courts use the terms interchangeably. Stein, supra, ¶ 6.07[3] & n. 13 at 6-18.
As noted previously, Perini contends that it substantially completed the project by mid-September 1984, and therefore should not be liable for lost profits from that date to the date of termination in December 1984. According to Perini, the award of lost profits for that period amounted to approximately $4,000,000. [2] Construction industry treatises agree with Perini. Siegfried states: The doctrine of substantial performance can be used as a defense to a breach of contract action for failure to complete a project within the contract time. In fact, unless otherwise specifically agreed, a liquidated damages provision is not enforceable for the period beyond the point of substantial completion. [Siegfried, supra, § 8.05.] As Williston points out, most commonly, the courts have applied the doctrine of substantial performance to cases that involve building contracts. The doctrine has been interpreted to allow a builder who has substantially performed a contract to recover the full price under the contract less any damages suffered by the owner due to the builder's breach. 6 Williston on Contracts § 842 (3d ed. 1962). That rule generally is followed in most American jurisdictions. 3A Corbin on Contracts § 701 (1960). The case law is in accord. In Jardine Estates, supra, the court stated that there is substantial performance of a contract `where all the essentials necessary to the full accomplishment of the purposes for which the thing contracted for has been constructed are performed with such an approximation to complete performance that the owner obtains substantially what is called for by the contract.' 42 N.J. Super. at 337, 126 A. 2d 372 (quoting 9 Am.Jur., Building and Construction Contracts § 42). In Feeney v. Bardsley, 66 N.J.L. 239, 49 A. 443 (E. & A. 1901), the Court found no error in the lower court's charge to the jury where it stated: [I]f the contractor has substantially performed his contract, even though he has failed to do so in some minor particulars, he is entitled to recover the contract price, less what will be a fair allowance to the owner to make good the defects in performance of the contract. [ Id. at 240, 49 A. 443.] In Van Dusen Aircraft Supplies, Inc. v. Terminal Construction Corp., 3 N.J. 321, 70 A. 2d 65 (1949), this Court, citing Feeney approvingly, stated in dicta that the rule of damages where a building is substantially completed, but is defective in some particulars, is the cost of making good the omitted or defective work. Id. at 329, 70 A. 2d 65. Accord Power-Matics, Inc. v. Ligotti, 79 N.J. Super. 294, 191 A. 2d 483 (App. Div. 1963); Winfield Mut. Hous. Corp. v. Middlesex Concrete Prods. and Excavating Corp., 39 N.J. Super. 92, 120 A. 2d 655 (App.Div. 1956); Amerada Hess Corp. v. Quinn, 143 N.J. Super. 237, 362 A. 2d 1258 (Law Div. 1976).
Perini and amicus, AGCA, argue that because the arbitrators awarded damages beyond the substantial completion date allegedly admitted by the parties, they departed from both public (judicial decisions) and private law (the parties' contract) in reaching their decision and thus imperfectly executed their powers, in violation of N.J.S.A. 2A:24-8d. When assessing damages after substantial completion of a project, courts have treated liquidated damages in a manner similar to that of lost profits. Thus, we have included several liquidated damages cases in our analysis. Courts have found that liquidated damages may not be imposed after the owner is able to put the project to its beneficial use or the owner has taken occupancy. Stein, supra, ¶ 6.07[3] at 6-18. The rationale behind that policy is that liquidated damages otherwise would become a penalty because those damages are designed to approximate an owner's loss before occupancy. Id. at 6-19. The reason for limiting liquidated damages was succinctly stated in Stone v. City of Arcola, 181 Ill. App. 3d 513, 130 Ill.Dec. 118, 536 N.E. 2d 1329 (Ill. App.Ct. 1989): The trial court found substantial completion on October 10, 1983. Since the project was sufficiently complete at the time to be used for the purpose for which it was intended, then it would seem appropriate to construe the liquidated damages provision to close at the time of substantial compliance, even though there may be minor repairs, adjustments, or finishing work remaining. After all, if the contractor can get paid at substantial compliance, that is the logical time to discontinue the applicability of the liquidated damages clause. If the contractor fails to complete the additional work, the owner's remedy is to have someone else complete it and sue the contractor to recover the expense. [ Id. at 1338.] That rule was applied in Monsen Engineering Co. v. Tami-Githens, Inc., 219 N.J. Super. 241, 530 A. 2d 313 (App.Div. 1987), a case involving a liquidated damages clause in a contract for the installation of heating systems in a public-housing project. The contract should have been completed by September 25, 1982; however, the contract was not substantially completed until December 31, 1984. Id. at 244, 530 A. 2d 313. The parties agreed that the date of substantial completion (December 31, 1984) was appropriate for purposes of calculating delay damages. Ibid. The Appellate Division found that the trial court, relying on those dates, had correctly assessed the delay as 800 days and affirmed the liquidated damages award. Id. at 251, 530 A. 2d 313. Also, in Utica Mutual Insurance Co. v. DiDonato, 187 N.J. Super. 30, 453 A. 2d 559 (App.Div. 1982), a case involving a contract for electrical work for the completion of a construction project at Stockton State College, the plaintiff argued that the trial judge had erred in assessing the date of substantial completion. Id. at 39, 453 A. 2d 559. The plaintiff asserted that substantial completion had occurred months before the actual completion date of May 14, 1976, and therefore it should not be liable for liquidated damages after the substantial completion date. The Appellate Division remanded the issue to the trial court, finding that the Director of the Division of Building and Construction had testified that substantial completion of the entire project had occurred around June of 1975. Id. at 41, 453 A. 2d 559. The court stated that it was not aware if the entire project had been occupied or used for its intended purpose during the September 1975 semester. Ibid. Thus, it was necessary to determine the substantial completion date prior to assessing the liquidated damages award. See also Public Health Trust of Dade County v. Romart Constr., 577 So. 2d 636 (Fla. Dist. Ct. App. 1991) (liquidated damages awarded for sixty-eight day delay in failing to substantially complete the project); Stone v. City of Arcola, supra, 536 N.E. 2d 1329 (liquidated damages can only be awarded until substantial completion date); American Druggists Ins. Co. v. Henry Contracting, Inc., 505 So. 2d 734 (La. Ct. App.) (same), cert. denied, 511 So. 2d 1156 (La. 1987); Page v. Travis-Williamson County Water Control and Improvement Dist. No. 1, 367 S.W. 2d 307, 310 (Tex. 1963) (holding substantial completion had occurred because water district took possession of all the lines, filled them with water and began using them to serve the customers of the water district). Case law also suggests that, like liquidated damages, lost profits can be assessed up to the date of substantial completion. For example, in D.A. Davis Construction v. Palmetto Properties, Inc., 281 S.C. 415, 315 S.E. 2d 370 (1984), the court awarded three months' lost rental income to the owner for the builder's failure to substantially complete the project on the date specified in the contract. Id. at 372. The owner presented evidence that the property was to have been rented to a beer distributor upon substantial completion. See also Hemenway Co. v. Bartex, Inc., 373 So. 2d 1356 (La. Ct. App.) (holding that the owner of retail store should receive the interest it had paid on interim financing and the rent paid on the old building for the period of delay until substantial completion), cert. denied, 376 So. 2d 1272 (La. 1979); Herbert & Brooner Constr. Co. v. Golden, 499 S.W. 2d 541 (Mo. Ct. App. 1973) (awarding delay damages for lost rental on theater and the costs of extending a construction loan until date of substantial completion). Cf. Brooks Towers Corp. v. Hunkin-Conkey Constr. Co., 454 F. 2d 1203 (10th Cir.1972) (holding no lost rentals can be awarded where delay in substantial completion was excusable). Thus, Perini's argument that delay damages cannot be awarded after substantial completion of the contract is amply supported by the case law and construction-industry practice. Had the arbitration panel found that Perini had substantially completed the project, as that term is defined in the contract, by September 15, 1984, then it may have erred in awarding lost profits from that date to the time Sands terminated the contract in December 1984. The Appellate Division resolved the issue by reasoning that there was enough evidence for the arbitrators to decide that substantial completion had not occurred before September 15, 1984. The court stated that [t]his is not a case from which it can be concluded the arbitrators were clearly mistaken as a matter of law or fact on Perini's failure to substantially complete the project by May 31, 1984, or the failure to substantially complete it by December 1984. That finding would not otherwise present a problem except that Sands appeared to agree, although it did not stipulate during the arbitration proceeding, that substantial completion of the project had occurred on September 15, 1984. For example, Sands stated in its Appellate Division brief: Although a temporary certificate of occupancy issued for the suites on September 15, 1984    work was still being done on some of the suites after that date.    At the time Perini was terminated, there was still much punch list work to be done. Perini never did complete the punch list. It also stated: While it is true (and Greate Bay has admitted) that substantial completion of the construction was achieved by September 15, 1984, this did not preclude Greate Bay from terminating Perini. That language suggests that Sands conceded generally that most of the work had been completed by September 15, 1984. The language does not suggest, however, that Sands fully conceded either that an award of consequential damages was precluded after September 15, 1984, or that it intended to give the expression substantial completion its construction-industry term-of-art meaning. Obviously, the Chancery judge was greatly troubled by the award of lost profits after September 15, 1984, stating that the contract was substantially complete and all the problems which were related as applying to the summer season were reduced. We have verified the various transcript references that refer to the condition of the property after September 15, 1984. For example, William Weidner testified that as of Thanksgiving 1984, Sands had a full-fledged disaster on [its] hands. Also, the lighted, glass-enclosed elevator, which was visible from the boardwalk and was part of the new park entrance, was not completed and operational until late November 1984. Similarly, Perini's work on the glass facade at the vehicle entrance on Indiana Avenue continued through the fall. Perini often had trucks and/or cranes parked on Indiana Avenue adjacent to or in the new entrance. Thus, it appears, as Sands argues, that although it was able to occupy the new park entrance in the fall while the renovation work continued, it greatly detracted from the building's appearance, obstructed customer access, disrupted operations, and contributed to Sands's loss of business. At its root, the doctrine of substantial performance rests on principles of fairness. Amerada Hess Corp., supra, 143 N.J. Super. at 253, 362 A. 2d 1258. It is intended to avoid the harshness of common-law contract doctrine so that the right of compensation of those who have performed `in all material and substantive particulars    may not be forfeited by reason of mere technical or unimportant omissions or defects.' Ibid. (quoting Gillespie Tool Co. v. Wilson, 123 Pa. 19, 16 A. 36, 37 (1888)). Sands contracted with Perini in large measure for the construction of an ornamental facade, which was intended to draw people to the casino. To apply the doctrine against Sands might be inequitable because Sands never received what it bargained for  an ornamental glass facade that would attract clientele to its casino. Such an appearance was not entirely achieved by September 15. The arbitrators could have found that the uncompleted work was not a mere technical or unimportant omission[] or defect[]. Because the doctrine rests on fairness, the arbitrators may have considered it fair to award damages even though the entrance could be used in its uncompleted state. See Birch Cooley v. First Nat'l Bank of Minneapolis, 86 Minn. 385, 90 N.W. 789, 790 (1902) (Rule of substantial performance does not apply where deviations from the contract are such that an allowance out of the contract price would not give the other party essentially what [it] contracted for.). Perini's argument also fails to take into account the possibility that the public's perception of the Sands building during the critical summer months could have had a significant impact on Sands's operations in the fall. There was evidence in the record concerning the importance of introducing the renovated facility to the public during the peak summer season. A Sands executive testified that the image created by an Atlantic City casino in the summer carries over into the following months. Thus, the situation is not directly analogous to that of a theater owner whose profits resume when the project is substantially completed, Herbert & Brooner, supra, 499 S.W. 2d 541, or the retail store owner who is able to transfer operations from one store to another, Hemenway, supra, 373 So. 2d 1356. Here, the arbitrators could have concluded that the delay in completion was an event of non-performance that carried over into the fall resulting in significant consequential damages after substantial completion. In other words, to give the worst case scenario, if, during a renovation, a contractor had left residual materials in a ventilator system that had caused a wide-spread epidemic in a hotel (as in the famous Legionnaire's disease case in Philadelphia, see Tom Mathews et al., The Mystery Fever, Newsweek, Aug. 16, 1976 at 16), would anyone doubt that after the project had been substantially completed, i.e., fully renovated, the consequential damages incurred by the proprietor would linger long thereafter? An event of non-performance caused a loss of income even after completion. We do not suggest that that is an identical or apt analogy; however, the evidence submitted to the arbitrators suggested that the casino was presented to the public in a poor light due to Perini's delay in completion. That delay and the resulting appearance could have caused profits to lag over the fall. Thus, the arbitrators' decision does not appear to depart from any clear holding that consequential damages cannot be awarded if the residual effects of non-performance of the contract are carried over into a period when the building is operational.