Does a No-Damages-for-Delay Provision Preclude a Claim for Disruption Damages?

Erik M. Coon | Smith Currie & Hancock

Delays and disruptions on construction projects are very similar, but there are important conceptual differences, even though the claims often arise on the same project. The primary distinction is that a disruption or loss of productivity claim usually involves the increased cost of less efficient work, while a delay claim involves the cost of not being able to work at all. In a recent decision by the United States Court of Appeals for the Fourth Circuit, United States ex rel. Aarow/IET LLC v. Hartford Fire Ins. Co., the appellate court reversed a federal trial court’s dismissal of a subcontractor’s breach of contract and Miller Act claims. Although it declined to answer whether the subcontract’s no-damages-for-delay provision also barred claims for disruptions, this decision emphasizes the importance for contractors to be mindful of the language they use in presenting a claim for delay or disruption when faced with similar contractual provisions.

The Dispute, Contractual Provision, and Request for Equitable Adjustment

The case deals with an electrical subcontractor’s breach of contract claim against the prime contractor arising out of a Virginia Marine Corps Base construction project. The subcontractor also sued the prime contractor’s payment bond surety under the federal Miller Act.

The subcontract included a “no-damages-for-delay” provision, which in relevant part, provided:

  1. In the event of any delays, entailed as a result of fault of Contractor. . ., then Contractor shall grant Subcontractor an extension of time equal to the delay and Subcontractor shall be entitled to no other or further damages against Contractor. . .
  2. Any delays or additional work entailed as a result of weather conditions, storms, acts of God, delays in construction, and delays by governmental bodies will not entitle the Subcontractor to any extras whatsoever.

The subcontractor sent the prime contractor a written request for equitable adjustment (“REA”) seeking $2.9 million for various “Delay Costs,” including additional time, labor, general conditions, overhead, and bond costs for 298 days of Project extension “Delay Days.” After the prime contractor refused to pay, the subcontractor filed suit, claiming that “the Project suffered from numerous disruptions, all of which impacted [the subcontractor’s] ability to prosecute its work on the Project in the timely, efficient, and sequential manner which it originally anticipated and planned when it compiled its price to perform its work on the Project.”

The Trial Court’s Ruling

In response, the prime contractor filed a motion to dismiss, arguing in part that the subcontractor’s complaint failed to plead facts that indicated the prime was responsible for the alleged disruptions to the subcontractor’s work or that the prime breached the subcontract. The subcontractor then filed an Amended Complaint, this time specifically claiming that the prime’s poor project management caused numerous disruptions, including labor inefficiencies and loss of productivity through comeback work, stacking of trades, out-of-sequence work, and idle labor crews, all of which adversely affected the subcontractor’s ability to perform its work in accordance with the schedule that the subcontracted price was based on.

The prime contractor filed another motion to dismiss, this time arguing that the disruption claims were barred by the subcontract’s no-damages-for-delay provision because the disruption claims were essentially delay claims as a matter of contract law. It also argued that the Amended Complaint was defective under the exhibit-prevails rule, because the REA conflicted with the disruption allegations in the Amended Complaint by calculating damages based on delay days.

In response, the subcontractor first insisted that there are meaningful distinctions between disruption and delay claims that would become clearer with discovery. It then argued that the exhibit-prevails rule is inapplicable because the REA does not state a delay claim and therefore did not conflict with the Amended Complaint. The subcontractor explained that the REA actually asserts a disruption claim and simply utilizes delay days to estimate the additional costs caused by the disruptions.

The trial court agreed with the subcontractor that there may be meaningful distinctions between disruption claims and delay claims. The court, however, sided with the prime contractor’s argument concerning the exhibit-prevails rule, finding that the REA was a delay claim and that the costs sought in the REA were a result of that delay, and therefore conflicted with the Amended Complaint’s disruption allegations.

As a result, the trial court dismissed the breach of contract claim against the prime contractor and the Miller Act claim against the surety because the Miller Act claim depended on the prime contractor’s liability for breach of contract.

Reversal By The Appellate Court

On appeal, the Fourth Circuit disagreed with the trial court’s finding that the REA states a delay claim and thus conflicts with the Amended Complaint’s disruption allegations. Although the REA repeatedly used the word “delay” and calculated “Delay Costs” based on “Delay Days,” the appellate court found that the REA also referred to “disruptions” and, according to the Amended Complaint, was not prepared until after the subcontractor sent several notices to the prime about disruptions to its work on the Project. The appellate court explained that because the notices may shed light on the meaning of an otherwise ambiguous REA, the district court erred by relying on the REA and the exhibit-prevails rule to dismiss the subcontractor’s breach of contract claim.

Practical Takeaways

Although the question of whether a no-damages-for-delay provision, such as the one contained in this subcontract, precludes a claim for disruption damages remains unanswered in this case at this point, this decision highlights the need for contractors to document their projects and be conscious of the language used in light of the relevant contractual provisions when preparing notices and claims.

No Longer in the Dark: A Primer on the Distinction between Delay and Disruption Damages in a Construction Dispute

Matthew DeVries | Best Practices Construction Law

If you are left in the dark about something, you don’t have the information you should have to make an informed decision.  Delay claims on a construction can be confusing, especially when you think about the delay to the work being performed and the disruption to other activities.  A few years ago, I found a case that shed some light on the delay v. disruption distinction.

In County of Galveston v. Triple B Services, LLP, decided on May 26, 2016, the Court of Appeals of Texas reviewed a contractor’s claim for damages on a road expansion project.  While the legal issue focused on the County’s right rely on the defense of sovereign immunity, the Contractor’s (and it expert’s) characterization of the damages was critical to the outcome of the case.  Since the applicable statute waives a county’s sovereign immunity for breach-of-contract damages that are “a direct result of owner-caused delays,” the Court had to decide whether disruption damages—as opposed to delay damages—were recoverable.

The Contract.  The County entered into an agreement with the Contractor to expand a three-mile stretch of road. Under the contract, the County was responsible for moving gas, water, and fiber-optic utilities.  According to the Contractor’s expert, the contract established a “baseline schedule … created by the County’s engineer,” which showed a starting date with unhindered access along the area of the road where the utilities were located. The contract allowed for “delay damages” if the Contractor’s request for those damages “is determined to be compensable.”

Owner-Related Delays.  Although the Contractor’s plans for the construction project anticipated that the County would move the utilities by a particular date, those utilities were moved almost one year later.  Nevertheless, the Contractor completed its work within the contract time.  According to the Contractor, it incurred additional costs to hand-form manholes, set and reset barricades, extended field office overhead, as well as additional labor, equipment, street cleaning, flagging, and traffic control—all of which resulted from the County’s delays in moving the utilities.

Sovereign Immunity Argument.  The County argued that Section 262.007 of the Local Government Code waives a county’s sovereign immunity for construction contracts involving claims for delay damages.  Here, the County relied heavily on the testimony of the Contractor’s expert witness who testified about the Contractor’s damages resulting from the County’s delays. Since the County did not timely move the utilities as anticipated in the original construction plan, that schedule of work was “disrupted.”  By seeking disruption damages, the County argued, the Contractor sought damages that were excluded from recovery under the statute.

So, are these delay damages or disruption damages?

On appeal, the Contractor agreed that its “disruption damages” do not meet the definition of “delay damages” as traditionally understood in the construction law arena. However, it argued that the statutory waiver of sovereign immunity for damages that are “a direct result of owner-caused delays or acceleration” includes more than “delay damages” as defined under construction law: “Disruption and lost productivity costs are … recoverable damages under the clear meaning of the words of the statute.”

The Court turned to the construction law bible written by Phillip Bruner and Patrick O’Connor to address the inquiry, noting that delay damages have a technical definition distinct from disruption damages:

 Delay damages refer to damages “arising out of delayed completion, suspension, acceleration or disrupted performance”; these damages compensate the contracting party that is injured when a project takes longer than the construction contract specified. . . .

Disruption damages, on the other hand, are for a project that may be timely completed but nevertheless includes disruption to the contractor and compensates it for “a reduction in the expected productivity of labor and equipment—a loss of efficiency measured in reduced production of units of work within a given period of time.” . . . Disruption damages can also be caused by an “event [that] both disrupts and delays a critical path activity….” A project that finishes on time but at greater expense because of disruptive events or scheduling errors presents a claim for disruption damages.

The Court’s Decision.  Based upon a plain reading of the statute, the Court concluded that Section 262.007 allows a claim for disruption damages against a county “if the disruption damages directly result from the county’s delay in performance of its contractual obligations….” Significantly, the statute did not distinguish between “delay damages” and “disruption damages” that are directly caused by the breaching party’s delay.

Lesson Learned.   According to the expert in this case, the Contractor incurred significant increased costs to finish the work on time. The Court’s opinion provides an excellent roadmap of the type of expert proof required to establish the damages sought by the Contractor, including the following:

  • The expert examined the “daily summaries” of work and “the manner [the project] was intended to be executed … [and] the manner by which the project was actually executed and some of the specific things that caused that deviation.”
  • Using this information, the expert testified that the Contractor had to adjust its approach to accommodate the County’s delay by “segmenting the work into smaller segments of the roadway, waiting on the utilities … just a various sundry of impacts that caused them to not be as productive from a direct labor standpoint.”
  • The “waiting on the utilities” caused the Contractor to waste “man-hours trying to deal with working around utilities and bouncing around back and forth and dealing with not being able to set barricades and … progress the roadway [in the way] that they thought they would be able to in an unhindered manner.”
  • The expert also testified that the Contractor had to add “a number of crews because they were working in so many different areas to try and progress the work….”
  • Finally, the expert opined that the Contractor’s clean-up crew also had to perform additional work because “whenever you slow down that progression and create situations where you’re excavating and you’re staging materials in one location[,] … you wind up with … more debris than if you were just moving in a steady progressive manner.”

Although the project in this case was finished on time and the Contractor never completely “stopped” its work, the Court readily found that the Contractor was “hindered” because of the County’s actions.  Since the type of recoverable damages include those that are “a direct result of owner-caused delays,” the Contractor could recover its disruption damages.

One Awesome Case Discussing The Difference Between Delay And Disruption Damages!

Matthew DeVries | Burr & Forman LLP | June 1, 2016

Rarely do you find a case that succinctly addresses a construction law issue. Today, one of my legal alerts pointed me to one such case dealing with delay damages and disruption damages. This is a must read!

In County of Galveston v. Triple B Services, LLP, decided on May 26, 2016, the Court of Appeals of Texas reviewed a contractor’s claim for damages on a road expansion project. While the legal issue focused on the County’s right rely on the defense of sovereign immunity, the Contractor’s (and it expert’s) characterization of the damages was critical to the outcome of the case. Since the applicable statute waives a county’s sovereign immunity for breach-of-contract damages that are “a direct result of owner-caused delays,” the Court had to decide whether disruption damages—as opposed to delay damages—were recoverable.

The Contract. The County entered into an agreement with the Contractor to expand a three-mile stretch of road. Under the contract, the County was responsible for moving gas, water, and fiber-optic utilities. According to the Contractor’s expert, the contract established a “baseline schedule … created by the County’s engineer,” which showed a starting date with unhindered access along the area of the road where the utilities were located. The contract allowed for “delay damages” if the Contractor’s request for those damages “is determined to be compensable.”

Owner-Related Delays. Although the Contractor’s plans for the construction project anticipated that the County would move the utilities by a particular date, those utilities were moved almost one year later. Nevertheless, the Contractor completed its work within the contract time. According to the Contractor, it incurred additional costs to hand-form manholes, set and reset barricades, extended field office overhead, as well as additional labor, equipment, street cleaning, flagging, and traffic control—all of which resulted from the County’s delays in moving the utilities.

Sovereign Immunity Argument. The County argued that Section 262.007 of the Local Government Code waives a county’s sovereign immunity for construction contracts involving claims for delay damages. Here, the County relied heavily on the testimony of the Contractor’s expert witness who testified about the Contractor’s damages resulting from the County’s delays. Since the County did not timely move the utilities as anticipated in the original construction plan, that schedule of work was “disrupted.” By seeking disruption damages, the County argued, the Contractor sought damages that were excluded from recovery under the statute.

So, are these delay damages or disruption damages?

On appeal, the Contractor agreed that its “disruption damages” do not meet the definition of “delay damages” as traditionally understood in the construction law arena. However, it argued that the statutory waiver of sovereign immunity for damages that are “a direct result of owner-caused delays or acceleration” includes more than “delay damages” as defined under construction law: “Disruption and lost productivity costs are … recoverable damages under the clear meaning of the words of the statute.”

The Court turned to the construction law bible written by Phillip Bruner and Patrick O’Connor to address the inquiry, noting that delay damages have a technical definition distinct from disruption damages:

Delay damages refer to damages “arising out of delayed completion, suspension, acceleration or disrupted performance”; these damages compensate the contracting party that is injured when a project takes longer than the construction contract specified. . . .

Disruption damages, on the other hand, are for a project that may be timely completed but nevertheless includes disruption to the contractor and compensates it for “a reduction in the expected productivity of labor and equipment—a loss of efficiency measured in reduced production of units of work within a given period of time.” . . . Disruption damages can also be caused by an “event [that] both disrupts and delays a critical path activity….” A project that finishes on time but at greater expense because of disruptive events or scheduling errors presents a claim for disruption damages.

The Court’s Decision. Based upon a plain reading of the statute, the Court concluded that Section 262.007 allows a claim for disruption damages against a county “if the disruption damages directly result from the county’s delay in performance of its contractual obligations….” Significantly, the statute did not distinguish between “delay damages” and “disruption damages” that are directly caused by the breaching party’s delay.

Lesson Learned. According to the expert in this case, the Contractor incurred significant increased costs to finish the work on time. The Court’s opinion provides an excellent roadmap of the type of expert proof required to establish the damages sought by the Contractor, including the following:

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