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Massachusetts Superior Court Strikes Down Disincentive Provision in MassDOT Bridges Contract

In an October 2020 summary judgment decision, the Massachusetts Superior Court upheld a general contractor’s challenge to the enforceability of a “disincentive” provision in a MassDOT construction contract. In addition to providing for liquidated damages, the contract stated that MassDOT “shall assess” a per day “disincentive deduction” in the event the contractor failed to achieve certain interim contractual milestones. After full briefing and a hearing, the Court concluded that MassDOT’s disincentive provision was an “unlawful penalty.” Hinckley Allen represents the general contractor.

The case arose out of a MassDOT contract for the replacement of four bridges in southeastern Massachusetts. The contract established interim milestones for completion of the bridges. In order to “encourage the Contractor to use innovative methodologies and techniques to achieve early Project completion and to achieve certain milestones,” the contract included an “Incentive/Disincentive Specification.” Simply stated, the provision rewarded early completion with potential bonus payments but subjected the contractor to “disincentive deductions” (up to a maximum of $600,000.00) for late completion of the milestones. The Incentive/Disincentive Specification made clear that it did not alter or otherwise affect the liquidated damages provision of the contract.

Invoking the Incentive/Disincentive Specification, MassDOT had assessed $600,000.00 in disincentive deductions on grounds that the contractor did not timely complete one of the interim bridge milestones. However, the presence of PCBs and asbestos (which required remediation) and other factors, had impacted the contractor’s performance time. Although the contractor had requested time extensions, MassDOT denied the contractor’s requests on grounds that the interim milestone was generally “not adjustable, regardless of fault or reason.”

On summary judgment, the Superior Court noted that “[c]ontracting parties cannot lawfully employ compensatory damages as a means to punish or incentivize.” That is – unlike liquidated damages provisions designed to provide reasonable damages for delays that are difficult to estimate – contractual “penalties” are not enforceable.

According to the Superior Court, “the Disincentive Deductions expressly aim – and operate – to deter [untimely performance], not compensate [for damages for delays].” And since the liquidated damages provision was drafted to cover “all” additional delay costs, MassDOT’s disincentive assessment could not also compensate MassDOT for delay costs. As a result, the Superior Court determined that “the Disincentive is simply a penalty for contract non-compliance, divorced from any anticipated damages estimate.” Stating that “[i]t follows that the Disincentive provision does not provide for liquidated damages and purports to impose an unenforceable penalty,” the court declined to enforce the disincentive provision.

The Superior Court’s decision does not create controlling law, did not resolve all issues in the case, and is subject to appeal. But at least for now, one Massachusetts court has – after careful analysis – concluded that disincentive language in a MassDOT contract is invalid on its face.

For additional information related to this article, please contact Robert T. Ferguson, Jr., Joel Lewin, Peter J. Martin, Christopher W. Morog, or any member of our Construction & Public Contracts Group practice group.

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