_____________________________________________ GRANTED AS TO ENTITLEMENT: September 7, 1995 _____________________________________________ GSBCA 13236 MFG PROPERTIES, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Stephen G. Crockett and Catherine L. Brabson of Giauque, Crockett, Bendinger & Peterson, Salt Lake City, UT, counsel for Appellant. Leigh Ann Holt, Office of Regional Counsel, General Services Administration, Denver, CO, counsel for Respondent. Before Board Judges DEVINE, NEILL, and DEGRAFF. NEILL, Board Judge. In this case, appellant, MFG Properties, disputes a claim by the General Services Administration (GSA) for $68,925.30. GSA's claim is brought under a lease of premises owned by appellant. The amount claimed is based on actual damages which GSA contends it suffered as a result of the lessor's failure to make the premises available in a timely fashion. Appellant admits that there was a delay and that GSA is entitled to recover damages pursuant to a liquidated damages provision in the lease covering delay in delivery of space for occupancy. Appellant challenges, however, GSA's right to any damages in excess of those which may be due under the liquidated damages clause. To expedite matters, the parties have asked that the Board examine first the single issue of whether GSA is entitled to any damages for delay beyond those to which the parties have agreed in the liquidated damages provision of their lease agreement. They have also asked the Board to decide this issue on the basis of record submissions without benefit of a hearing. See Rule 9. Based on that record and the applicable law, we conclude that GSA is not entitled to the actual damages claimed. We, therefore, grant the appeal as to entitlement. Findings of Fact The lease under which this dispute arises was awarded on September 3, 1993. As awarded, the lease contained the following provision concerning the occupancy date: Occupancy is required by April 30, 1994 or within 210 calendar days from lessor's receipt of approved Government layout plans, whichever is later. Appeal File, Exhibit 1, 1. The lease contains the following provision concerning delay in delivery of space for occupancy: In case of failure on the part of the lessor to complete the work within the time fixed in the lease contract or letter of award, the lessor shall pay the Government as fixed and agreed liquidated damages pursuant to the clause, the sum of $850.00 for each and every calendar day that the delivery is delayed beyond the date specified for delivery of all the space ready for occupancy by the Government. Appeal File, Exhibit 1, 3. The contracting officer has explained in the decision from which MFG Properties now appeals that, in determining the daily rate of $850.00 for the liquidated damages, she relied on a chart of recommended rates set out in an instruction of the Public Buildings Service (PBS), a GSA bureau. These rates reflect anticipated supervisory and administrative costs but not any estimated increases in the Government's rental obligations which might result from a delay in occupancy. The contracting officer has explained that she saw no need to make any provision in the liquidated damages figure for an increase in rental obligations because the original occupancy date in the lease was April 30, 1994, while the prospective tenants were in space which was leased until February 1995. Appeal File, Exhibit 5. In early June 1994, the contracting officer requested an updated schedule to assist in planning for final inspection and move-in. Appeal File, Exhibit 36. By letter dated June 9, a spokesman for appellant advised that the company was "pushing" for substantial completion by July 31 and foresaw completion of the job by August 15. Id., Exhibit 10. A subsequent letter from the contracting officer to appellant, bearing the date of June 15, advised appellant that the contracting officer planned to perform a substantial completion inspection on July 21 and 22, and a tentative final inspection during the week of August 1. Id., Exhibit 37. By certified letters dated June 30, the contracting officer sent termination notices to two lessors who were then housing the Government offices which were to be transferred to the new premises to be made available by appellant. Both letters advised the lessors of the Government's intention to "quit, relinquish, and vacate the premises" on August 31, 1994. Appeal File, Exhibit 30. Upon making an on-site inspection in July 1994, the contracting officer concluded that the new premises would not be available for occupancy until September 6. Appeal File, Exhibit 24. On August 8, therefore, MFG Properties and GSA, by supplemental agreement no. 3 to their lease, formally established September 6, 1994 as the occupancy date. Id., Exhibit 1. Appellant did not meet the September 6 occupancy date. An occupancy permit for the new space was not issued until September 23. Appeal File, Exhibit 24. After moving the new tenants into appellant's building, GSA received claims from its two previous lessors for failure to vacate their premises as scheduled. One lessor's claim is for $3,265.83. The other lessor's claim is for $72,334.38. This second claim includes rental for a semester period as opposed to a month's holdover. The explanation given is that the lessor's new tenants were academic institutions and could not relocate during a semester. Appeal File, Exhibits 20, 24. In early January 1995, the contracting officer requested appellant to pay GSA for the amounts being claimed by the prior lessors. Appeal File, Exhibit 3. Appellant, in a letter dated January 9, denied liability for anything other than what respondent was entitled to recover under the liquidated damages clause in the lease. Id. Exhibit 4. On March 3, 1995, the contracting officer issued a final decision on GSA's claim for $68,925.30.[foot #] 1 In making this claim, the contracting officer expressly contends that the amounts being sought represent damages incurred "specifically due to the delay in occupying the new space provided for under the specified lease." Appeal File, Exhibit 5. ----------- FOOTNOTE BEGINS --------- [foot #] 1 This is a net figure representing two credits which GSA is apparently prepared to allow appellant under the lease. The Government's claim without adjustment for these credits is said to amount to $75,600.21. Since this decision does not concern quantum, we make no findings here regarding the specific amount claimed by the Government or the credits applied. ----------- FOOTNOTE ENDS ----------- Shortly after receipt of the contracting officer's decision, appellant attempted to negotiate a settlement of the Government's claim and asked the contracting officer to reconsider her decision. Appeal File, Exhibits 24-29, 32. By letter dated March 31, 1995, the contracting officer rejected appellant's offer of settlement and reaffirmed her earlier decision of March 3. Id., Exhibit 34. Appellant thereupon appealed that decision to the Board. Id., Exhibit 8. Discussion The Government gives up the right to obtain actual damages for any harm covered by a liquidated damages provision. Simmonds Precision Products, Inc. v. United States, 546 F.2d 886 (Ct. Cl. 1976); Sorensen v. United States, 51 Ct. Cl. 69 (1916). The liquidated damages provision in this case, by express terms, covers the situation in which the lessor has failed to complete work within the time fixed in the lease and assesses a penalty for each and every calendar day of delay in delivery of space for occupancy by the Government. In this case, supplemental agreement no. 3 fixed a specific date for occupancy and that date was not met. Furthermore, the contracting officer in her decision acknowledges that the damages sought were specifically due to appellant's delay in occupying the new space under the lease. Based on the record before us, therefore, we conclude that the actual damages sought by GSA pertain to a situation which is expressly covered by the liquidated damages clause. The actual damages which GSA seeks, therefore, are not recoverable if the clause itself is enforceable. We hold that the clause is enforceable. In an earlier decision involving the same liquidated damages provision, we listed three criteria which must be met in order to enforce a liquidated damages provision. First, the provision itself must not be a penalty. Secondly, the amount of actual damages must have been difficult to ascertain as of the time the contract was made. Thirdly, the amount of liquidated damages must bear a reasonable relation to the expected actual damages. First Interstate Bank of Denver, N.A., GSBCA 9484, 89-1 BCA 21,453, at 108,108. In this case these three criteria have been met. A genuine liquidated damages provision does not constitute a penalty. Thermodyn Contractors, Inc. v. General Services Administration, GSBCA 12510, 94-3 BCA 27,071, at 134,910. Rather, it represents an attempt to fix just compensation for anticipated loss which may flow from a future breach of the contract. For reasons set out below, we are convinced that the liquidated damages provision in appellant's lease is not an unreasonable one and, therefore, does not constitute a penalty. As to the requirement that the actual damages must have been difficult to ascertain as of the time the contract was made, the clause covers damages flowing from delay in occupancy. Traditionally, damages from a breach of this nature are recognized as being difficult to formulate in advance. Indeed the contracting officer's use of a rate chart specially developed by GSA for use in liquidated damages provisions covering delay confirms this fact. The key criterion in this case is that the amount of liquidated damages must bear a reasonable relation to the expected actual damages. At the time the lease was awarded, this was certainly true. Respondent has shown us nothing to the contrary. The contracting officer, herself, states that she adopted a recommended rate which reflected estimated supervisory and administrative costs but no increases in rental obligations. She explains that she expected no increase in rental obligations resulting from any possible delay in occupancy. Presumably this was because rent on the newly leased premises would not be payable in the event of delay and the prospective tenants were already occupying space secured by leases which could continue for as long as ten months beyond the original occupancy date. Thus, rental costs would be roughly the same, whether the Government stayed in its old quarters or moved to new ones. Contrary to the contracting officer's expectation, rental obligations ultimately did figure as part of the damages resulting from a delay in occupancy. Acting on appellant's estimated completion date and without the benefit of an actual site inspection or a formal contract amendment, the contracting officer, in late June 1994, issued termination notices on the previously awarded leases and established a termination date which she subsequently discovered could not be met. Because the alleged actual damages from delay substantially exceed the contracting officer's estimate at the time the lease was drafted, she now seeks to collect them rather than the liquidated damages to which the parties originally agreed. Respondent goes so far as to argue that the difference between actual damages and liquidated damages is now so great as to constitute an unfair penalty against the Government for appellant's breach of the lease. See Respondent's Brief at 4. Respondent's case against enforcement of the liquidated damages provision fails because it is based on an after-the-fact application of the criterion of reasonableness. It is well established that the determination of whether the standard of reasonableness of a liquidated damages provision is met must be made at the time the provision is agreed upon and not at the time of breach or at some other subsequent time. Priebe & Sons, Inc. v. United States, 332 U.S. 407, 412 (1947); United States v. Bethlehem Steel Co., 205 U.S. 105, 121 (1907). The reason for this is obvious. Liquidated damages provisions are a legitimate technique to allocate the risks associated with a possible breach before it occurs. The reasonableness of the provision is, therefore, to be assessed at the time it is entered into and not after the consequences of the provision become apparent. Whether actual damages are greater or less than those originally anticipated is immaterial to the enforcement of a liquidated damages provision. If the conditions of the provision are reasonable at the time it is agreed upon, a party has the right to its enforcement. Jennie-O Foods, Inc. v. United States, 580 F.2d 400, 412 (Ct. Cl. 1978). In this case, respondent has shown us nothing to suggest that the rates included in the liquidated damages provision covering delay were unreasonable at the time it was written because the rates did not include a component reflecting increased rental obligations. On the contrary, the contracting officer's explanation for why no such component was included is highly persuasive. Based on what the parties knew and expected at the time the lease was entered into, therefore, the daily figure to which they agreed was not unreasonable and is, therefore, enforceable -- regardless of how great any subsequent actual damages may have been or who may have been ultimately responsible for them. Decision This appeal is GRANTED as to entitlement. GSA is not entitled to any damages for appellant's delay in delivery of space for occupancy beyond those provided for in the lease provision dealing with liquidated damages for delay. Since this decision is limited to entitlement only, we make no finding at this time on the quantum to which GSA may be entitled under this liquidated damages provision of the lease. The quantum of the Government's claim remains before the Board. Within thirty days of this decision, the parties are directed to advise the Board of the status of their efforts to resolve this remaining issue of their dispute. _______________________ EDWIN B. NEILL Board Judge We concur: _______________________ _______________________ DONALD W. DEVINE MARTHA H. DEGRAFF Board Judge Board Judge