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March 1, 2010

Power Owners in Strong Position to Collect Liquidated Damages

By Judah Lifschitz, Esq. and James McMichael, Esq.

In what may be the U.S. construction industry’s largest-ever liquidated damages award, in late 2009 a unanimous three-member arbitration panel awarded $26.95 million against engineering, procurement, and construction (EPC) giant Bechtel Power Corp. in favor of an independent merchant power company, New Athens Generating Co., LLC (Athens Generating Co. et al. v. Bechtel Power Corp.).

Aerial view of the New Athens plant. Courtesy: New Athens Generating Co. LLC

The award serves as an important demonstration of the potential impact of liquidated damages provisions in EPC contracts. EPC contractors should not assume that liquidated damages will be renegotiated or that the owner will later agree to extensions of time for performance. Courts and arbitration panels can and do enforce the terms agreed to by the parties at the time of contracting, especially when dealing with knowledgeable, experienced, and sophisticated power industry owners and EPC contractors. Though the law is not uniform in all American jurisdictions and must therefore be researched thoroughly in the applicable jurisdiction, power industry owners should be aware that they have a strong position with respect to collecting liquidated damages for EPC contractors’ inexcusable delays.

Liquidated Damages: Athens as a Case Study

Liquidated damages provisions are common in EPC contracts. Typically, they specify performance liquidated damages due to the owner if the EPC contractor fails to meet plant performance requirements, and damages due to the owner if the EPC contractor fails to meet required completion dates, known as “delay liquidated damages.” The award of liquidated damages in the Athens case consisted of delay liquidated damages.

Power industry owners risk various types of construction delay damages, including out-of-pocket expenses such as financing and interest during construction, the cost of the owner’s equity contribution during construction, and general and administrative costs during construction. Importantly, an owner’s construction delay damages also include lost opportunity costs, particularly lost operating revenues because the plant cannot operate as soon as planned and as contracted for in the EPC contract. Because these various types of construction delay damages can be difficult to prove with precision, the inclusion of liquidated damages provisions in EPC contracts is not only common, but appropriate.

The recent Athens decision demonstrates the significance of liquidated damages clauses and their contentious nature. Liquidated damages provisions and exposure to liability for liquidated damages are too frequently not given the weight they deserve. EPC contractors sometimes assume that liquidated damages will be renegotiated or that the power industry owner will agree to extensions of time for performance. However, the Athens case clearly demonstrates that liquidated damages clauses can and will be enforced.