Have You Been ‘Delayed’ or ‘Disrupted’? – Why the Distinction Matters

Ann B. Graff | Pepper Hamilton LLP | August 2017

No-damages-for-delay clauses are commonly found in construction contracts and, with certain exceptions, are generally recognized as valid and enforceable. The exact language can vary, but the typical clause provides that the contractor shall have no claim for compensation for delay and that an extension of time shall be the contractor’s sole remedy. While the case law is fairly uniform and well-developed regarding the effect no-damages-for-delay clauses have on claims for delay damages, whether these clauses also bar disruption damages is less clear.

“Delay and disruption” damages are often lumped together, but they have distinct definitions. “Delay damages” refer to damages “arising out of delayed completion, suspension, acceleration or disrupted performance.” 5 Philip J. Bruner & Patrick O’Connor, Construction Law § 15:29 (6th ed. 2002). These damages compensate a contractor that is injured when a project takes longer to complete than the construction contract specified. Conversely, “disruption damages” occur when a project may be timely completed, but at a greater expense to the contractor because of disruptive events caused by another party. Id. at § 15:102. Disruption damages compensate the contractor for the resulting reduction in its expected productivity in labor or equipment. Id.

Often, a no-damages-for-delay clause will also expressly bar disruption damages. And, even when the word “hindrance” or “disruption” is not expressly used, many courts have held that disruption damages caused by the breaching party’s delay are also barred by a no-damages-for-delay clause. See, e.g., Cleveland Constr., Inc. v. Ohio Pub. Emps. Ret. Sys., 10th Dist. No. 07AP-574, 2008-Ohio-1630, 2008 Ohio App. LEXIS 1403 (Ohio App. 10th Dist. April 3, 2008); The Law Co. v. Mohawk Constr. & Supply Co., 523 F. Supp. 2d 1276, 1285-86 (D. Kan. 2007) (contractor’s sole remedy of “schedule extension” for contractor’s delays barred subcontractor’s claim for disruption damages), rev’d on other grounds, 577 F.3d 1164 (10th Cir. 2009); U.S. ex rel. Tenn. Valley Marble Holding Co. v. Grunley Constr., 433 F. Supp. 2d 104, 109-11 (D.D.C. 2006) (holding that contractual provision allowing damages for delays “recovered on [Supplier’s] behalf by the Contractor from the Owner” barred disruption damages because “the ordinary meaning of the word ‘delay’” encompasses disruption damages that are caused by another party’s late performance.).

Recently, however, in Central Ceilings, Inc. v. Suffolk Construction Co., 75 N.E.3d 40 (Mass. App. Ct. 2017), the Massachusetts Court of Appeals refused to bar a subcontractor’s claim for disruption damages, holding that the no-damages-for-delay clause only precluded claims for “delay.” Central Ceilings involved the construction of three dormitories at Westfield State University. The dormitories were to be ready for occupancy by students arriving for the 2005 fall semester, with a substantial completion date of July 1, 2005. As an incentive for the general contractor, Suffolk Construction Company, to finish on time, its contract provided that it could earn a bonus for completing the project early or face liquidated damages for finishing late.

Central Ceilings, Inc. served as a subcontractor for installation of the exterior heavy metal gauge framing, drywall and hollow metal door frames. Critical to Central’s estimate and ability to timely complete its work was the “flow” of the project, with each aspect of work following in sequence, floor by floor, exterior to interior, building by building.

From the outset, the project was plagued by problems, as Suffolk failed to coordinate the work of other trades; failed to establish proper elevation, column and control lines from which Central worked to construct the building; failed to provide for and timely coordinate delivery of the hollow metal door frames; and failed to ensure that the buildings were weather-tight, all of which were essential to Central’s ability to complete its work.

As a result, Central’s workers were repeatedly forced to break down and remobilize to different areas to carry out different tasks, then go back and remobilize to complete the original task. Central’s supervisory personnel were also forced to spend an inordinate amount of time coordinating all of the changes and filling out related paperwork. The problems also resulted in significant trade stacking.

Given the substantial completion date and the related financial incentives and disincentives, Suffolk advised Central that no time extensions would be granted. As a result, while the start dates for various aspects of Central’s subcontract work were consistently pushed back due to Suffolk’s various breaches, the completion dates remained the same and the time within which Central had to perform was constantly compressed. Central was forced to assign additional manpower to keep the project on track. Ultimately, while the project was substantially completed on time, Central’s productivity was significantly impacted.

The trial judge found that Suffolk breached the contract and awarded Central damages for its lost productivity. The judge determined that the contract’s no-damages-for-delay clause did not apply because Central was not, in fact, seeking damages “for delay.” The appeals court upheld the judge’s ruling, rejecting Suffolk’s suggestion that the finding was in error because Central was seeking damages “caused by delays.” The appeals court noted that no-damages-for-delay clauses are strictly construed due to their harsh effects. In strictly construing the contract language, the appeals court found that Central was not seeking damages because it had been delayed but, rather, because it had been forced to increase its workforce due to the compression of the schedule caused by Suffolk’s breaches. Quoting the trial judge, the appeals court noted that “Suffolk’s breaches did not affect Central’s ability to complete its work on time . . . but, rather . . . its ability to complete its work on budget.”

Central Ceilings is not the only case to hold that disruption damages may be recoverable despite a no-damages-for-delay clause. In John E. Green Plumbing & Heating Co. v. Turner Construction Co., 742 F.2d 965 (6th Cir. 1984), the court agreed that the no-damages-for-delay clause, strictly construed, only barred delay damages and not damages due to hindering the contractor’s work. See also Mecca Constr. Corp. v. All Interiors, Inc., No. 06-3823, 2009 Mass. Super. LEXIS 253 (Mass. Super. Middlesex Oct. 16, 2009) (allowing contractor to recover increased labor and other costs required to timely complete the job in light of hindrances despite no-damages-for-delay clause).

Given the lack of consistency in case law regarding applicability of a no-damages-for-delay clause to claims for disruption damages, consider the following:

  1. Be familiar with the state’s law applicable to your project. Do not simply assume that disruption claims are barred by a no-damages-for-delay clause.
  2. When drafting a no-damages-for-delay clause, expressly include language to also bar disruption damages (i.e., “no claim . . . for hindrances or delays”; “delayed . . . or obstructed or hindered”).
  3. As a party seeking to recover disruption damages, be mindful of the distinction between delay and disruption damages and be sure to carefully characterize your claim in correspondence and claim filings.

The Trouble With ‘Which’ and ‘That’

Gary Blake | Claims Journal | August 11, 2017

In my book, The Elements of Business Writing (Pearson Education), I have a section on “Misused and Troublesome Words.” Among the most troublesome pairs of words in English are which and that. Most people use them interchangeably, but each has its special place in communication.

I wrote, “Ideally, that is used with a restrictive clause – a clause absolutely necessary to the meaning of the sentence (e.g., This is the project that will launch your career.)

Which is used with a nonrestrictive clause – a clause that is parenthetic and is not necessary to the meaning of the sentence (e.g., The executive committee, which is made up of vice-presidents, has not discussed the problem.).”

A clause is simply a group of words containing a subject and a verb.

Another writer illustrates the difference between “which” and “that” by giving us four sentences in which the adjective clause has been bracketed:

  1. Our house [that has a door and green shutters] needs painting.
  2. Our house, which has a red door and green shutters], needs painting.
  3. The classrooms [that were painted over the summer] are bright and cheerful.
  4. The classrooms, [which were painted over the summer], are bright and cheerful.

In all four cases, the adjective clause tells us something about either the house or the classrooms, but the choice of which or that changes the way we should read each sentence.

For example, in the first sentence, the use of that suggests we own more than one house and therefore must explain to you that we are talking about a particular house of ours – the one with the red door and green shutters. We cannot leave out the adjective clause because it is essential to your understanding of the sentence, that is, you wouldn’t know which one of our houses needs the paint job without the adjective clause.

The which clause in the fourth sentence is called a nonessential – or nonrestrictive clause. Since that sentence intends to tell us that ALL the classrooms were painted, the information in the adjective clause is not essential. the sentence would be clear even if the clause were omitted.

It’s my guess that about 70 percent of the time we use which we really ought to use the restrictive that. For example:

“The pen, which I gave you, is broken.”

Or, did you mean to specify: “The pen that I gave you is broken.” The word that, once again, specifies that only the pen that I gave you is broken.

By now, you can see that in the majority of cases, the word that can be left out without harming the sentence: “The pen I gave you is broken.” Without that, the idea still comes across: The [particular] pen I gave you is broken.

Many teachers refer to a clause starting with “which” as a “which clause” and should signal that the words following which may add some interesting information, but are not essential to the meaning of the sentence. To test out if you need that instead of which, read your sentence aloud and insert the phrase “the particular one” before that [ The (particular) lawsuit that was tried in South Carolina has national implications regarding the wording of reservations of rights letters. Clearly, in this case, the writer is specifying that ONLY the lawsuit tried in South Carolina is being discussed.

When is an Unforeseen Condition a “Differing Site Condition”?

Vernon Howerton | Texas Construction Law Blog | August 16, 2017

I was reviewing various articles I have written over the years and came across a prior version of this one about differing site conditions, written nearly twenty years ago.   I was curious – does this cup still hold water?  It does.

Many construction contracts contain some version of a “differing site conditions” clause.   It is found in the current version of AIA’s A201 general conditions, as well as in the EJCDC equivalent.   It also appears in most state DOT specifications, as well as in federal government construction contracts.   Generally, it provides for a change order (subject to procedural compliance) when the contractor encounters (i) subsurface or other concealed conditions that differ materially from the conditions indicated by the contract documents or (ii) unknown physical conditions of an unusual nature differing materially from those ordinarily encountered and recognized as inherent to the work provided for in the contract documents.   But, as they say, “timing is everything.”   This adage applies, too, to a differing site conditions claim.

In Olym­pus Corp. v. United States, 98 F.3d 1314 (Fed. Cir. 1996), the United States Federal Circuit Court of Appeals was confronted with the following ques­tion: Are delays caused by a govern­ment caused hazardous materi­als spill compensable under the federal Differing Site Condi­tions clause?  The court an­­­­­s­wered “no” based on its con­clusion that to be con­sidered a differing site con­dition, the condition must exist at the time the contract was formed.

Olympus entered into a fixed price contract with the United States to pave the plant yards at the Stratford Army Engine Plant located in Strat­ford, Connecticut. As man­­­­­­­­­­­­­dated by the Federal Acquisition Regulation, 48 C.F.R. ‘ 52.236-3 (1995), the contract contained a standard Differing Site Conditions clause which provided, in part, for an equitable adjustment, upon notice, of  “subsurface or latent physical conditions at the site which differ materially from those indicated in [the] contract.”

The plant site was man­aged under a separate contract be­­­tween the United States and Tex­tron Lycoming.  Short­ly after the Notice to Pro­ceed, Tex­tron cut open an oil pipe in the plant yard which caused a spill that contaminated soil in the yard and prevented Olympus from paving.  Olympus was delayed by the clean up effort and sought additional compensation under the Differing Site Conditions clause.  After rejecting the Contracting Officer’s offer of additional compensation as inadequate (Olympus also had an additional claim for delay caused by a strike of Textron employees), Olympus filed suit in the U.S. Court of Federal Claims.  That court found, in part, the Differing Site Conditions Clause only provided com­pensation for delays caused by conditions which existed at the time the contract was formed.  Olym­pus ap­­­­­­­­­­­­­­­­­­­pealed.

The Court first dis­­­­­­­­­­cussed the purpose of the Differing Site Conditions clause, pointing out it is historically used to shift to the government the risk of adverse subsurface or latent physical conditions, as such risk would be normally born by the contractor in a fixed price contract.   Through inclusion of the clause, the government encourages “more accurate bidding” by discouraging contractors from including con­tingencies in their bids to cover the risk of differing site conditions.  However, according to the court, the clause only shifts those risks which are consistent with the policy of the clause — encouraging more accurate bidding.  It does not shift the risk of all unanticipated conditions.  As such, the court implied the clause did not operate to transfer the risk of nonexistent conditions since such conditions do not affect the accuracy of bidding.

Next, the court established the fact its “precedent has long imposed a temporal limitation on the applicability of the Differing Site Conditions clause.”  Particularly, it cited John McShain, Inc. v. United States, 179 Ct. Cl. 632, 375 F.2d 829 (1967) and Arundel Corp. v. United States, 96 Ct. Cl. 77 (1942) for the prop­osition that for “half a century,” federal courts have interpreted the clause as not applying to conditions which “come into being only after the contract has been executed of the work commenced.”

Finally, the court dismissed Olympus’ argument that there was no express provision in the differing site conditions clause which limited its operation to conditions existing at execution of the contract.  Olym­pus particularly argued that adoption of the government’s interpretation inappropriately gave effect to the governments “subjective intent” over the clear terms of the contract.  The court acknowl­edged that it was obligated to interpret the contract according to its “ordi­nary and commonly ac­­­cepted meaning.”  However, it also stated it was obliged to inter­pret the contract from the per­spective of a “reasonable and prudent contractor” and is bound by precedent.  Based on precedent, the court found a “reasonable and prudent con­­­­­tractor…would have been familiar with the long-stand­ing limitation on a Differing Site Conditions clause to con­ditions existing when the con­tract was executed.”   Since the soil was not contaminated by the oil spill at the time of execution of the contract, the Court rejected Olympus’s claim in its entirety.

Comment

Olympus is still good law.   See Extreme Coatings, Inc. v. United States, 109 Fed. Cl. 450 (2013).  However, Olympus only discussed com­pensability under the fed­eral Differing Site Conditions Clause.  Other avenues may well have been available for recovery of the damages caus­ed by the spill, including change, breach of warranty, suspension of work, and breach of duty not to hinder or delay. The Court even implied as much.

A case awarding compen­sation to the Contractor under similar circumstances but using a different theory is Shea v.  City of Los Angeles, 6 Cal.  App. 2d 534, 45 P.2d 221 (1935).  It involved an action for costs of extra work created when a sewer leaked into a drain­age excavation.  The leak caused flooding of the excava­tion and its collapse.  The con­tract purported to place the risk of “any unforeseen obstruction or difficulties, either natural or artificial, which may be en­countered in the pro­secution of the work…on the Contractor.”  The court found, however, that “the contract did not contem­plate that [the Contractor] should bear the burden of the city’s negligence in doing or permitting acts which would constitute an obstacle to the [Contractor’s] fulfilling the obligations imposed by the Con­­tract.”  Similar logic ap­plies to the oil spill encoun­tered by  Olym­pus.  The gov­ernment should not have per­mitted activities which would jeopardize Olym­pus’ ability to perform the work.

It is unclear why other the­ories were not before the Olym­pus court.  The court hinted that it considered the actions of the plant manager, Textron, as the actions of a third party for whom the govern­ment was not responsible.  Such an argument may have affected the trial court’s ruling on the other listed possible theories, if such theories were before the court.

More significantly, how­ever, the Appellate Court seemed to ignore the fact that Textron was acting in its ca­pacity as a separate govern­ment contractor. As such, the government should have had some sort of duty to coordinate Tex­tron and Olympus’ work such that Textron did not inter­fere with Olympus.  Ob­viously, the government could better control Textron and its perfor­mance than Olympus.  As such, the government could more easily bear the risk of damages caused by Textron’s actions.  Many government contracts are indeed written to place risks on the shoulders of the party best able to control them.

In order to fairly allocate risks, many state and local gov­ernment contracts, as well as private ones, now place the risk of unforeseen hazardous conditions on the government.  We have seen this ac­complished in a separate con­tract clause or via modifica­tions to standard differing site conditions clauses.  Absent such a modification or reallo­cation of risk, “reasonable and prudent contractors” need be aware that while the govern­ment may shoulder the burden of hazardous conditions at a work site which exist prior to contract formation under the traditional Differing Site Con­ditions clause, as interpreted by the Federal Circuit, that clause does not place the risk of unforeseen subsurface or la­tent physical conditions created after contract formation.

Construction Contracts And Arbitration Provisions: Is The Word “May” Mandatory? Maybe!

Matthew DeVries | Best Practices Construction Law | August 10, 2017

You don’t always say what you mean. And you don’t always mean what you say.  In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations.

As an example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word “may” was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same decision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., “any and all disputes,upon mutual agreement, may be arbitrated” or “with the consent of the other party, either party may commence arbitration”).  It is important in contract drafting that you say what you mean and you mean what you say.

The Metaphysics of When an Accident is an “Accident” (or Not) Under Your Insurance Policy

Garret Murai | California Construction Law Blog | July 31, 2017

As an undergrad, I remember taking an introductory philosophy class. When we came to the chapter on metaphysics our professor asked what makes an apple an apple? “We have a specific name for it, presumably, to distinguish it from other things,” she said. “But what makes an apple an apple?”

From there we went into a rabbit hole. With some students describing an apple by its colors, shape, size, smell and that it grows on trees and others trying to distinguish an apple from other things, which in turn led to further discussions such as  why we believe apples come in red, green and yellow, whether an apple is still an apple if a person was colorblind, etc. In the end, we were questioning whether we were even in existence and sitting in a university classroom.

Insurance can be a bit like that sometimes. When is an accident an accident? If you engage in an intentional act that results in an unintended consequence, is it an accident? In Navigators Specialty Insurance Company v. Moorefield Construction, Inc. (December 27, 2016) 6 Cal.App.5th 1258, the Court of Appeals for the Fourth District, while not answering the question of the nature of existence, did shed some light on when an accident is an accident.

Navigators Specialty Insurance Company v. Moorefield Construction, Inc.

In 2003, general contractor Moorefield Construction, Inc. entered into a construction contract with developer D.B.O. Development No. 28 for the construction of a Best Buy store in Visalia, California. The construction was completed and the store opened later that year.

As early as the grand opening of the store and through 2009, Best Buy noticed that carpet tiles were not sticking to the floor, that the edges of the carpet tiles were curling, that moisture and adhesive were oozing through the carpet tile edges, and that there was staining along the edges of the carpet tiles as well as odors. In 2009, Best Buy notified the building owner JSL Properties, LLC that it would be replacing the carpet tiles and withholding rent under its lease. Best Buy completed the flooring repairs later that year and withheld $377,404 from rent.

In 2010, JSL filed suit against Moorefield and DBO to recover the rental amounts withheld by Best Buy. DBO, in turn, filed a cross-complaint against Moorefield and others asserting various causes of action including equitable indemnity. Moorefield tendered JSL’s complaint and DBO’s cross-complaint to its commercial general liability insurer, Navigators Specialty Insurance Company, which accepted tender under a reservation of rights.

During the course of litigation it was discovered that prior to installing the carpet tiles Moorefield ran two series of moisture tests on the underlying concrete slab. Under the terms of the construction contract, the slab on grade’s maximum moisture content was not to exceed five pounds per 1,000 square feet of slab. Both moisture tests revealed that the moisture content exceeded the contract limit. However, rather than wait for the moisture content to fall, and to avoid a potential delay in the store opening, Moorefield directed its flooring subcontractor to install the carpet tiles.

In 2013, the parties settled for $1.3 million with JSL receiving $885,000 and DBO receiving $425,000. Navigators, on behalf of Moorefield, contributed its policy limit of $1 million. Thereafter, Navigators filed suit against Moorefield seeing an order from the court that it had no duty to defend or indemnify Moorefield under its commercial general liability policy.

Specifically, Navigators argued that coverage Section A of the policy only applied to bodily injury or property damage that “is caused by an ‘occurrence’” and that the term “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Navigators further argued that, because Moorefield deliberately decided to direct its flooring subcontractor to install the carpet tiles despite the higher than contractually permitted moisture content of the concrete slab, there was no “occurrence” giving rise to coverage under the policy.

Following a six-day bench trial, the trial court found in favor of Navigators and Moorefield appealed.

The Court of Appeals Decision

On appeal, the Court of Appeals affirmed and reversed in part.

While Navigator’s policy did not define “accident,” explained the Court, California law does. “In the context of liability insurance, an accident is ‘an unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown clause’” and “[t]his common law construction of the term ‘accident’ becomes part of the policy and precludes any assertion that the term is ambiguous.” “Under California law, the word ‘accident’ in the coverage clause of a liability policy refers to the conduct of the insured for which liability is sought to be imposed on the insured” and “[a]n accident does not occur when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.”

And here, explained the Court, Moorefield knew the vapor emission test results exceeded the specifications yet directed its subcontractor to install the carpeting tiles anyway. Moreover, explained the Court, the testimony of Moorefield’s President, Michael Moorefield, and project manager,  Jay Cote, that there was little to no risk installing the carpet tiles was irrelevant since “[a]n insured’s mistake of fact or law does not transform and intentional act into an accident.”

The Building Industry Legal Defense Foundation filed an amicus curiae brief arguing that construction defects should always be deemed an “occurrence” under a commercial general liability policy, even when a contactor intentionally performs work with knowledge that its work could lead to harm, since the harm itself is fortuitous and unintended and therefore an “accident.”

In response, the Court emphasized that it was not deciding whether all construction defects are “occurrences” under a commercial general liability policy, but rather, only whether Moorefield’s conduct constituted  an accident under the policy. And, here, concluded the Court, Moorefield’s conduct was not an accident because it was a deliberate decision made with knowledge that the test results exceeded specifications.

Conclusion

Moorefield sets a benchmark against which the obligation of insurance carriers to defend a claim will be measured. Where an insured engages in a deliberate act with knowledge that a particular harm is likely to occur no coverage will be found to exist. However, this is just one point, and an extreme one at that, along a spectrum of possibilities, with unanswered questions such as when a harm is considered to be foreseeable, how certain must it be that a harm will occur, etc.? Metaphysical enough for you?