In a case of first impression, on April 21, 2015, in Old Colony Construction, LLC v. Town of Southington, the Supreme Court of Connecticut unanimously held that a municipality's election to terminate a construction contract for convenience did not preclude it from recovering liquidated damages against a contractor for project delays, even though the town itself was partially responsible for some of the delays (316 Conn. 202 (2015)).

In 2004, the Town of Southington (Town) and Old Colony Construction, LLC (Old Colony) entered into a contract for the demolition of an existing sewer pump station and the construction of a wet well, pumping station and above grade garage. The contract outlined the responsibilities of the parties and the procedures for seeking extensions of time and increases in the contract price for delays beyond Old Colony's control.

The contract stated that the project owner could terminate the contractor "without cause and without prejudice to any other right or remedy of [the Town]." The contract specifically included that time was of the essence with a substantial completion date of January 17, 2005. The agreement allowed for liquidated damages of $400 per day beyond January 17 until substantial completion was achieved. To receive an extension of time, the contract required that the parties agree to the extension in a change order or contractual amendment.

There were immediate delays in the project because Old Colony misunderstood when the contract time commenced. In response, the project engineer reminded Old Colony of the contract provisions for liquidated damages and the methods for obtaining an extension of the construction period. Old Colony later complained that the Town delayed in responding to Old Colony's requests and the parties agreed to extend the substantial completion date to June 14, 2005.

Old Colony eventually discovered that the contract documents inaccurately portrayed the location of electrical wires and the elevation of sewer lines. Old Colony encountered other unforeseen site conditions that led to change orders, but there was never an agreement on the impact to the schedule or contract price. After another disagreement, the Town stated that it would not agree to any substantial changes in the contract time or costs and reiterated its reservation of rights and remedies, including recovery of liquidated damages.

After threatening several times to terminate the contract for cause, the Town decided to terminate for convenience. Old Colony submitted its final payment application and requested an equitable adjustment in the contract price. The Town rejected the payment application and Old Colony filed a written claim with the project engineer as required under the contract. The project engineer failed to issue a written decision, which effectively denied the claim. Old Colony then commenced a breach of contract action and the Town filed a counterclaim to offset against liquidated damages.

The trial court stated there was no dispute that under the termination for convenience provision, Old Colony could recover:

However, the trial court held that Old Colony was not entitled to an equitable adjustment because it failed to follow the contractual procedures for obtaining adjustments for delays beyond its control.

The trial court also rejected Old Colony's argument that the Town was precluded from recovering liquidated damages because the Town contributed to the delays. The contract contained a mechanism to reset the date from which liquidated damages would run, but Old Colony failed to follow the procedures.

The court awarded Old Colony damages, but they were offset by the liquidated damages owed to the Town. The final judgment was in favor of the Town for $150,559.36, which led to the current appeal.

The ultimate issue for the Connecticut Supreme Court to decide was whether the Town's decision to terminate for convenience precluded it from pursuing its contractual rights and remedies as if it had terminated Old Colony for cause.

Old Colony argued that:

The Town countered that:

The Connecticut Supreme Court came to the following decisions:

Construction counsel should ensure that its contracts are drafted to accurately convey the intent of the parties. After execution of the contract, the parties should refer to the contract's provisions as soon as any question arises and strictly comply with the outlined procedures.

Counsel for project owners should ensure that the termination for convenience clause expressly reserves the owner's contractual rights and remedies, including the recovery of liquidated damages, if applicable. Contractors should consider that a reservation of rights in a termination for convenience clause may be enforceable.

Counsel for contractors should not assume that the contractor will be relieved of liability for any pre-termination defaults if terminated for convenience rather than for cause when the clause reserves rights and remedies.