Disputes between design-builders and their design professionals can be particularly difficult when a project falls behind schedule.
The designer may insist that it is entitled to payment for services performed, while the design-builder believes that the designer’s delays have caused losses exceeding the unpaid fees. Many design agreements contain provisions intended to limit the circumstances in which compensation can be withheld.
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Do those provisions prevent the design-builder from asserting its own delay damages? A recent federal district court decision in Maryland, Wiley & Wilson Inc. v. Pontiac Drywall Systems Inc., offers helpful guidance.
The case
Pontiac Drywall Systems Inc. was awarded a design-build contract by the Naval Facilities Engineering Systems Command for renovation work at the U.S. Naval Academy. After its initial arrangement with another design firm fell apart, Pontiac contracted directly with Wiley & Wilson to serve as architect of record.
Their agreement provided that Wiley & Wilson would be paid $1.125 million and stated that Pontiac could “not withhold amounts from the Architect’s compensation to impose a penalty or liquidated damages on the Architect … unless the Architect” agreed or had been “found liable for the amounts in a binding dispute resolution.”
The agreement also incorporated a design schedule prepared by Wiley & Wilson that had, among other things, a specific date by which Wiley & Wilson would complete the Issued for Construction documents.
Wiley & Wilson submitted its final design more than 14 months late. Wiley & Wilson disputed responsibility for this delay, pointing to NAVFAC’s rejections of its submissions and Pontiac’s alleged project management failures. However, Wiley & Wilson’s vice president acknowledged that Pontiac did not contribute to Wiley & Wilson’s delay in submitting the 100% prefinal design to NAVFAC and that Wiley & Wilson did not have any difficulty communicating with Pontiac during the project’s design phase.
As the project moved forward, Pontiac started withholding payments from Wiley & Wilson for design and construction administration services. The decision states that this covered 20 invoices totaling $741,124. Pontiac did not pay these invoices, even though it certified Wiley & Wilson’s services to NAVFAC and received payment from NAVFAC for them, and even after NAVFAC reminded Pontiac that federal regulations required timely payment of subcontractors from those proceeds.
Wiley & Wilson ultimately sued Pontiac to recover its outstanding fees, and Pontiac counterclaimed for breach of contract based on the alleged design delays. Pontiac’s damages expert attributed approximately $2.43 million in extended overhead costs to the delay. Wiley & Wilson moved for summary judgment on its claims and Pontiac’s counterclaim.
The ruling
One basis for Wiley & Wilson’s summary judgment motion was that Pontiac’s withholding of payment breached the contract’s provision that Pontiac could not withhold payment “to impose a penalty or liquidated damages” unless Wiley & Wilson agreed or had been found liable for the amounts being withheld.
While Pontiac admitted that Wiley & Wilson had not agreed to the withholding nor been found liable, Pontiac argued that its withholding was neither a penalty nor an imposition of liquidated damages. Rather, Pontiac argued that Wiley & Wilson’s delays caused Pontiac to suffer damages and that Pontiac properly withheld payment to recoup those damages based on Maryland law.
The court declined to hold as a matter of law that the contractual withholding restriction barred Pontiac’s defense of recoupment. The decision noted that under Maryland law, recoupment permits a defendant to reduce or defeat a monetary claim based on the plaintiff’s failure to meet an obligation arising from the same transaction and that the party seeking recoupment bears the burden of establishing its entitlement to it.
The court distinguished a punitive withholding from an effort to counterbalance actual losses caused by the other party’s alleged breach. Specifically, Pontiac had presented evidence that the alleged design delays had generated extended overhead costs substantially greater than the unpaid invoices. The court concluded that this evidence created a genuine dispute as to whether Pontiac withheld payment to counterbalance those losses rather than to punish the architect.
Wiley & Wilson also argued that Pontiac suffered no damages because it had been paid by NAVFAC for Wiley & Wilson’s work. The court was not persuaded because the record showed that Pontiac’s claimed extended overhead costs far exceeded the unpaid fees. The court likewise rejected Wiley & Wilson’s argument that Pontiac’s withholding itself gave Pontiac unclean hands and barred recoupment.
The court also rejected Wiley & Wilson’s contention that Pontiac needed a registered architect as an expert witness to pursue its counterclaim. Wiley & Wilson argued that because the counterclaim alleged breach of the contract’s standard-of-care provisions, expert testimony was required.
The court observed, however, that Pontiac’s counterclaim was not limited to that theory; Pontiac also alleged that Wiley & Wilson breached its contractual obligation not to exceed the schedule’s time limits without reasonable cause. While expert testimony was necessary to establish a claim based on the violation of a professional standard of care, Pontiac alleged that Wiley & Wilson breached its contractual obligation to meet the schedule.
In the court’s view, a factfinder could understand the difference between a promised completion date and actual completion without an expert explaining the professional standard of care, stating:
Ultimately, the end date of the Schedule … was eclipsed by over four-hundred days. … The Court agrees with PDSI that no expert testimony is required for a factfinder to understand that taking “more than twice the agreed upon duration to complete (performance under the Contract)” constitutes a breach.
Consequently, the court held that Wiley & Wilson was not entitled to summary judgment on Pontiac’s counterclaim and denied Wiley & Wilson’s motion in its entirety.
Takeaways
It is important to remember that the court’s denial of Wiley & Wilson’s summary judgment motion did not establish that Pontiac would prevail in the litigation. For example, the court did not decide whether Wiley & Wilson caused the delays, whether every dollar claimed by Pontiac was recoverable, or whether Pontiac ultimately had a right to retain the unpaid fees. Those issues are left for the factfinder at trial. However, by denying the motion, the court deprived Wiley & Wilson of an early resolution and required it to continue incurring the legal and expert fees needed to advance its arguments.
This case highlights a particular problem that design professionals face on design-build contracts – namely, ensuring that the design professional is paid for its work during performance.
Professional liability policies often cover defense costs, but they generally do not cover the attorney fees a design professional incurs in collecting payment for its services. As a result, design professionals will often insist on contract language that limits or precludes a contractor from withholding fees while the work is ongoing.
Unfortunately for Wiley & Wilson, the clause it drafted and relied upon barred withholding to impose a penalty or liquidated damages or to offset change-order costs but did not expressly address withholding to recoup the design-builder’s actual delay damages.
The decision is a strong reminder to designers that limitations on withholding should be stated clearly and comprehensively. By the same token, this decision should not be read as a general license for design-builders to stop paying designers whenever they assert delay damages. The court found only a triable factual dispute, leaving Pontiac with the burden of proving its entitlement to recoupment. In addition, on federal projects a prime contractor that withholds subcontractor payments after being paid by the government may face prompt-payment scrutiny, as NAVFAC’s inquiry here illustrates.
The decision is also a reminder that a contractual schedule is not merely an administrative exhibit with little legal significance. Here, the schedule was expressly made part of the agreement, and its deadlines – which the parties agreed not to exceed “without reasonable cause” – supported a breach theory distinct from professional negligence. Designers should be attentive to the schedules they prepare or accept, and both parties should document changes, review periods, and responsibility for delays as the work proceeds.
The decision’s discussion of expert testimony is noteworthy.
A claim that a design professional negligently exercised professional judgment typically requires expert testimony. A claim that a party failed to meet an express contractual deadline, however, presents a different question. Although the breach itself may be apparent to a lay factfinder, causation is another matter: Both parties may still need scheduling or delay experts to explain why the work was late and who bears responsibility.
While the court did not address causation directly, Wiley & Wilson’s own vice president’s admissions that Pontiac did not contribute to the delay in the 100% prefinal submission and that communications were not a problem suggest that Wiley & Wilson may face a significant hurdle in showing that it was not responsible for the 14-month delay in completing the design.
