With some of the winners in the recent City of Harrisonburg election pledging to stop golf course construction as soon as possible, many are wondering how much terminating the project will cost the City. The contracts with the greatest dollar value are those with W.R. Love Golf Course Architecture and with Turf Drain, Inc., the construction contractor. Although the City has entered into other agreements related to the golf course project, such as a timber sale and cutting contract, these other agreements are not as significant.
The contract with the architect does not appear to expose the City to any great liability for early termination. The agreement basically states that it may be terminated by the City “upon ten (10) days written notice... should the project be permanently abandoned.” Upon such termination, the City must pay for all services rendered to date. The services covered by the architect’s contract include not only those provided by the architect, but also engineering services provided by Williamsburg Environmental Group. Accordingly, upon early termination, the City will have to pay for all architectural and engineering services rendered prior to termination of the agreement. However, it appears that the City would not incur any additional costs for early termination of this agreement.
Early termination of the contract with the construction contractor will likely be costly to the City. The agreement provides that the City “may, at any time, terminate the Contract for the [City’s] convenience and without cause.” However, the agreement also states that upon such termination, the City will pay the contractor: (1) for work done to date, (2) for costs incurred as a result of the termination and (3) an additional $200,000.00 as liquidated damages. It is unlikely that the City will be able to avoid paying for work done to date or for costs incurred as a result of the termination. However, the City might dispute whether additional damages are due.
The City may argue that the liquidated damages provision is invalid. Generally, liquidated damages clauses are enforceable in situations where damages would be uncertain and difficult to calculate. They are also generally enforceable where it appears from the agreement and/or situation that the parties, at the time of contracting, have attempted to fairly estimate damages. The provision in the contract between the City and the contractor might satisfy either of these scenarios. Liquidated damages are generally not enforced when they are in the nature of a penalty. The City would likely argue that this is the case.
If the City is successful in invalidating the liquidated damages clause, it will then be necessary to determine the method of assessing damages. The City could argue that because the damages provision in the contract is invalid, no damages are due. It is extremely unlikely such an argument would succeed. Instead, if the liquidated damages clause is invalid, the contractor will likely receive its lost profits.
There are two possible bases for the award of lost proffits. First, the liquidated damages clause was actually contained in an addendum to the contract. The liquidated damages language replaced the following language in the original contract: “In case of . . . termination for the Owner’s convenience, the Contractor shall be entitled to receive . . . reasonable overhead and profit on the work not executed.” If the liquidated damages clause is struck, the language that the clause replaced could be used to determine the method of assessing damages.
The second basis for awarding lost profits could be reliance on basic common law contract principles. Generally, the remedy for a breach of contract is to place the parties in the position they would have been in had they performed the contract. In this case, if the contractor had been allowed to fully perform, he would have been left with his profits.
The determination of the amount of profit that the contractor would have realized would be a factual question that the parties, an arbitrator or a court would resolve. The total contract price is $2,889,855.00. As expected, the contract does not specify what portion of this amount constitutes profit for the contractor. If the contractor’s profit were ten percent of the contract price, its profit would be $288,986.00. Accordingly, the City should weigh its options carefully before challenging the liquidated damages provision. Nevertheless, whether the City pays liquidated damages or lost profits, the costs associated with terminating the contract with Turf Drain, Inc. could be substantial.
Another approach the City could take is to claim that the contract with the construction contractor is ulta vires. That is, the City would argue that formation of the contract was beyond the scope of the City’s powers. If such a premise were established, the contract would not be enforceable against the City. It is unlikely that such an approach would succeed.
An ultra vires argument by the City could be based on the Virginia Public Procurement Act (Va. Code Ann. § 11-35 et seq.). It appears that one component of the bid submitted by Turf Drain, Inc. was a proposed form of contract to be used for the project. When the City and the contractor finally executed the contract, they used a different form for the agreement. The Act’s definition of “competitive sealed bidding” specifies that the written Invitation to Bid must contain or incorporate by reference “the specifications and contractual terms and conditions applicable to the procurement.” The City could argue that because these specifications were not followed, the contract is invalid.
Such an argument would likely fail for several reasons. First, it is unlikely that the Act was violated. Although we have not examined the contract submitted with the bid, it is doubtful that its terms were substantially different from those in the contract actually executed. It is very unlikely that the City actually purchased something different from that solicited in the bid.
Next, even if the act was violated, it is doubtful that the City could use the violation as a basis to avoid its obligations under the agreement. The Public Procurement Act is not designed to be a tool for reversing political decisions. Va. Code Ann. § 11-35(G) specifies that the Act is intended to ensure that:
public bodies in the Commonwealth obtain high quality goods and services at reasonable cost, that all procurement procedures be conducted in a fair and impartial manner with avoidance of any impropriety or appearance of impropriety, that all qualified vendors have access to public business and that no offeror be arbitrarily or capriciously excluded.
It is very unlikely that the City, the party responsible for ensuring compliance with the Act, could use a violation of the Act as a basis for avoiding the contract.