By Michael C. Loulakis and Lauren P. McLaughlin
One of the biggest risks contracting parties face on private sector construction projects is an owner’s claim that it is entitled to recovery of lost profits as the result of project delays. Contractors often manage this risk by insisting that owners agree to clauses that waive lost profits and other consequential damages.
Another way to manage this risk is through liquidated damages, which define the contractor’s liability for delay and enable the contractor to understand its financial plight if the project is delayed.
But what happens when the prime contract does not limit the contractor’s liability for lost profit? As demonstrated in this issue’s case, Redstone International Inc. v. J.F. Allen Co., the results can be devastating.
The disputes in this case arose from a West Virginia gas processing facility owned by MarkWest Liberty Midstream & Resources. MarkWest had a “take-or-pay” contract with EQT Corp., whereby MarkWest processed natural gas for EQT. Under the contract, EQT had the option to direct MarkWest to expand its facility to process additional gas. In spring 2014, EQT directed MarkWest to add an additional processing plant, which was required to be complete in 24 months.
The project included the design and construction of a 100 ft high by 1,250 ft wide retaining wall to contain soil excavated in connection with the new processing plant and to level the site to make room for future buildings. MarkWest awarded a design-build contract for the wall to J.F. Allen Co. Allen subcontracted the design of the wall to AMEC Foster Wheeler Environment & Infrastructure and the construction of the wall to Redstone International Inc.
AMEC’s design called for Redstone to sequentially drill, install, and grout soldier piles and rock anchors (horizontally) into a mountainside and then “install precast concrete lagging panels and walers between the vertical soldier piles up to the elevation of the horizontal rock anchors,” according to the opinion.
The wall construction was delayed and impacted by a number of problems. For example, in some locations, when Redstone tested the rock anchors, the vertical soldier piles shifted and the concrete lagging panels installed between the soldier piles cracked. Some of the rock anchors began to shear off the wall’s face, while others failed.
Relations among the parties soured, and Allen ultimately terminated Redstone for cause after Redstone had completed about 95% of its scope of work. For a variety of reasons, including the wall construction, plant operations started one year behind schedule.
MarkWest ultimately sued Allen, AMEC, and Redstone in a West Virginia state court. MarkWest’s lawsuit asserted a number of claims, including a delay claim against Allen for MarkWest’s lost profits under its take-or-pay contract with EQT. Allen, AMEC, and Redstone also asserted a variety of claims against each other and MarkWest.
The case was transferred to West Virginia’s Business Court Division, and, after a 17-day trial, the business court issued a 153-page decision sorting out all the claims, including MarkWest’s claim for lost profits.
At trial, MarkWest contended that Allen was responsible for 8.8 months of delays to the project and that this resulted in lost profits of nearly $6.7 million because MarkWest could not deliver gas to EQT. Allen argued that MarkWest concurrently delayed the project. Allen also argued that its team caused a delay of 5.82 months and not 8.8. Of the 5.82 months, Allen argued it was “responsible for one month, Redstone for 3.2 months, and AMEC for 1.6 months,” per the opinion.
The business court agreed with Allen’s calculations and ultimately found that Allen owed MarkWest approximately $2.65 million in delay damages for lost profits, with Redstone being responsible to indemnify Allen for about $1.5 million of that amount. Redstone appealed a number of issues to the West Virginia Supreme Court of Appeals, including the lost profit award against it.
In considering Redstone’s arguments, the appeals court stated that it could not reverse the business court’s account of the evidence if the evidence “is plausible in light of the record viewed in its entirety ... even though convinced that had we been sitting as the trier of fact, we would have weighed the evidence differently,” per the opinion. With this background, the appeals court evaluated each of the errors alleged by Redstone and found against Redstone on each one.
Redstone first argued that it was not foreseeable that any delays in completion of the wall would cause MarkWest to lose profits because Allen’s design-build contract was separate from the contracts to construct the processing plant. The appeals court rejected this argument, finding that the business court heard evidence demonstrating that Redstone was aware that MarkWest’s wall construction was needed to permit the expansion of its gas processing plant at the project site.
Redstone next argued that MarkWest’s delay damages claims were based on unreliable testimony by MarkWest’s expert. Redstone claimed that the expert “ignored the impact of delays” by parties other than Redstone and that even MarkWest’s actions significantly delayed completion of the project, according to the opinion. This, too, was rejected by the appeals court, which generally found that the business court had considered each of these points.
Redstone’s final argument was based on its belief that the business court erroneously interpreted the subcontract to require Redstone to indemnify Allen. Redstone argued that Allen was barred from recovering from Redstone because of the following subcontract provision: “Redstone will not be liable for any additional costs, penalties, or back charges due to liquidated, actual, or consequential damages.”
In response, Allen argued that the quoted language “does not relieve liability for consequential damages but only as to costs, penalties, or back charges due to such damages.” Allen also cited the Damages for Subcontractor Delay provision of the subcontract, which stated, in part, that Allen “may suffer financial loss if the Work is not completed within the times specified. ... (Redstone) shall pay to (Allen) its actual damages, including those damages paid to (MarkWest) or others by (Allen) attributable to (Redstone’s) failure to timely perform.”
The appeals court agreed with Allen. It found that the language cited by Redstone did not broadly waive consequential damages. Moreover, the language of the Damages for Subcontractor Delay clause addressed directly the case at hand, as Allen was ordered to pay $2.65 million to MarkWest, which was an “actual damage,” some of which was “attributable” to Redstone’s failure to timely perform the construction.
The business court found that Redstone’s untimely performance resulted in $1.5 million of the $2.65 million judgment entered against Allen in favor of MarkWest.
Redstone had a nearly $6.6 million subcontract and was found liable for nearly a quarter of that subcontract value based on lost profits to the project owner. By the evidence presented, the court found that Redstone’s deficient performance caused three months of project delay.
The Damages for Subcontractor Delay clause is not an unusual clause, and by its plain reading it exposed Redstone to the results of this litigation. Perhaps Redstone thought that the clause addressing “liquidated, actual, or consequential damages” would protect it. In this case it did not, and both the business and appeals courts’ decisions are logical when one looks at this clause.
The clause does not read like a typical waiver of consequential damages clause and in combination with the Damages for Subcontractor Delay clause, supports the courts’ decisions.
A couple other takeaways from this case are noteworthy. It is not unusual to have experts disagree on excusable delay, concurrent delay, and allocation of delay among parties. This is a reminder that parties need to have experts who take credible positions and do not simply espouse extreme positions to maximize the positions of their clients.
While we do not know for certain what happened before the business court, it appears that it significantly discounted (and maybe even fully disregarded) MarkWest’s expert’s opinion.
A related point to remember is the view taken by some that it is too difficult for an entity to prove lost profits, so that is not really a practical risk that should be considered. While it may be hard to prove these damages, it is not impossible, as evidenced by this case. In fact, there are many other reported decisions in which lost profits for delay have been awarded.
It is far better for parties to agree in advance on the loss associated with a delay and quantify that in a liquidated damage formula. This not only substantially eliminates the challenge of proving delay damages, but it enables the contracting parties to understand their exposures.
Michael C. Loulakis ([email protected]) is the president and CEO of Capital Project Strategies LLC in Reston, Virginia. Lauren P. McLaughlin ([email protected]) is a partner of Smith, Currie & Hancock LLP in Tysons, Virginia.
This article first appeared in the September/October 2023 print issue of Civil Engineering.