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:
- 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. . .
- 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.
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.