Owners and builders anticipate the completion of a project from the day construction begins. The process of finishing is normally a happy occasion. But when problems have developed during the project and questions regarding performance or completion have arisen, the event of finishing is often less than the "happy day" the parties would like for it to have been.
Perfection in construction is not required; substantial performance and substantial completion is the recognized standard. Louisiana Revised Statute 38:2241.1 contains one definition of substantial completion:
When a statutory provision is clear and unambiguous and does not lead to absurd consequences, parties should apply it as written. In such circumstances, the statute would need no interpretation and under Louisiana law, judicial interpretation would be forbidden. But, a district court recently found a project was not substantially complete because a warranty document was not provided by the contractor. Is this consistent with the definition of substantial completion?
The statutory and jurisprudential definitions of substantial completion are similar. Under the jurisprudence, a project is substantially complete when "the construction is fit for the purpose intended despite the deficiencies." The project may be substantially complete even though there are deficiencies.
Louisiana courts consider four factors to determine if the project is substantially complete: (1) extent of the defect or non-performance, (2) degree to which the purpose of the contract is defeated, (3) ease of correction, and (4) use or benefit to the owner of the work performed.
In Salard v. Jim Walter Homes, Inc., the court found that a house served its purpose of functioning as a dwelling. The court found substantial performance and granted the effect of substantial completion, although workmanship was of poor quality and there were defects existing in the work. The court in Salard allowed the payment to the contractor for the contract price but offset by the amount required to correct the substandard and defective work.
Who has the burden of proving substantial completion? Obviously, it should be placed on the contractor. The burden is generally considered satisfied if the Engineer or Architect, public or private, makes a final inspection and recommendation of acceptance. A court, however, may find substantial performance and substantial completion, despite the design professional's recommendation.
Once the contract is substantially complete, the contractor is entitled to recover the balance of the contract price and the burden is shifted to the owner to prove the existence of defects caused by the contractor and the cost of repair or "perfecting the work or completing the work". Failing that, the owner must pay the entire contract price without deduction.
In Design & Corrosion Engineering, Inc., v. Piggly Wiggly of Mansfield, Inc., the court held that owner's evidence of repair costs was insufficient to meet its burden, since "it did not purport to directly address with any degree of precision the nature of the work contemplated to correct the proven deficiencies." Thus, the contractor was entitled to the entire contract balance, without offset or deduction.
The owner's final acceptance of a contractor's work (whether a public or a private owner), without objection, protest or complaint, will preclude the recovery of damages related to defects discovered or which should have been discovered at the time of acceptance. However, an acceptance with the understanding that parties will remedy certain defects does not bar recovery for the cost of remedying such defects. Thus, a "punch list" which identifies incomplete or defective work should accompany any certification of substantial completion. It is advisable to secure the contractor's concurrence and written agreement to perform punch list items.
On a related topic, the Public Bid Law regulates payments due under the contract. Louisiana Revised Statute 38:2248 provides that the public entity may not withhold more than ten percent retainage on projects of less than $500,000 and five percent on projects of $500,000 or more. Further, the public entity must pay the retainage in accordance with the contract and in accordance with La. R.S. 38:2191, which provides:
B. Any public entity failing to make any final payments after formal final acceptance and within forty-five days following receipt of a clear lien certificate by the public entity shall be liable for reasonable attorneys fees.
C. The provisions of this Section shall not be subject to waiver by contract. (Emphasis added.)
Retainage may not be withheld by the public entity past the time required above for payment, even if defects or warranty items are discovered.
W. P. Wray, Jr. is a partner with the firm of Wray & Kracht, L.L.P., in Baton Rouge, Louisiana, general counsel to LAGC. Questions or comments can be directed to Mr. Wray at P. O. Box 80239, Baton Rouge, Louisiana 70898, telephone 504/928-3200, fax 504/928-3266, e-mail, firstname.lastname@example.org.