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.

Court Recognizes Day-to-Day Changes Are Compensable Despite Contractual Waivers

Matthew DeVries | Best Practices Construction Law

It happens all the time! The owner-contractor agreement contains a “no damages for delay” clause; a clause requiring that all changes be in writing before work is performed; and a clause requiring partial lien waivers and releases with each periodic payment.  And yet we see a claim for delays and extras filed at the end of a construction project that challenges these very contract provisions.

The Court of Appeals of North Carolina recently grappled with this exact scenario in Gamewell Mechanical, LLC v. Lend Lease Construction (Sept. 1, 2020) (PDF).  The project involved the new construction of three buildings in Durham, North Carolina.  The mechanical subcontractor filed suit against the prime contractor for $2.7m for breach of contract for nonpayment, claims for delay damages and enforcement of its lien rights.  The prime contractor argued that subcontractor’s claim should be limited to its contract balance of approximately $500k in retainage. Ultimately, the trial court awarded the subcontractor more than $800k for its claims.

On appeal, the contractor argued that the award should have been limited to the $500k in retainage.  By executing lien waivers and releases with each periodic payment, the contractor argued, the subcontractor had waived all of its claims other than retainage. The parties’ lien waiver contained language where the subcontractor could have reserved disputed claims, but the subcontractor never did so. The appellate court held that the trial court properly rejected a majority of the subcontractor’s claims that were subject to either the “no damages for delay” clause or the period lien waivers.

Notably, the trial court made a distinction for “day-to-day” or “daily” changes in the field for extra work, which was credited by the appellate court as follows:

[I]t is undisputed that there were delays, numerous Change Orders issued, re-sequencing, and coordination issues occurring throughout the project. Given the daily problems that arose as a result of these issues, [subcontractor’s] failure to reserve claims regarding the day-to-day miscellaneous items done in the field at the direction of [contractor] is not a material breach-of-contract. . . . The waiver and release documents submitted with each pay application could not cover claims not readily apparent due to daily changes on the job.

The appellate court held that competent evidence supported the trial court’s decision on each of these points.

A New Exception?

The opinion is notable because of the court’s findings that are highlighted in bold and underline above. When I read the court’s opinion, I started to think: (1) Is there now a “daily changes” exception to lien waivers and releases? (2) Are day-to-day miscellaneous items compensable even where a party fails to reserve their rights on these type of  cumulative claims? According to the court in Gamewell Mechanical, the answers these questions is yes. It would be interesting to see what other courts have reached similar conclusions.

No-Damages-for-Delay Clauses and the COVID-19 Crisis

Scott Paton | Hodgson Russ Construction Alert

Although “construction” was originally deemed by Governor Cuomo to be “essential”, and thus exempt from the restrictions imposed by his March 18, 2020 Executive Order, that has since changed. Through subsequent Executive Orders, as interpreted by various State agencies, the reach of COVID-19 has extended deeply into the construction industry to preclude “non-essential” or “non-emergency” construction projects. Accordingly, construction projects across the State are grinding to a halt.

Project delays cause damages – whether in the form of continued overhead or additional fixed costs. In order to address this situation, no-damages-for-delay clauses have become very common practice in public contracts, and in the private sector as well. Furthermore, such clauses are not limited to prime contracts. Quite often, these clauses are found in subcontracts and sub-subcontracts, as a means to allocate risk as between the contractee (whether the owner [in a prime contract], the general contractor [in a subcontract], or the subcontractor [in a sub-subcontract]) and the contractor.

What does this mean? Are owners and general contractors fully insulated from claims for delay damages by these contract provisions? Are contractors or subcontractors whose projects are sidelined by COVID-19 left with no remedy to recover delay damages from the contractee in light of a no-damages-for-delay clause? The short answer to both questions: No.

In New York, there are four instances where a no-damages-for-delay clause will be rejected, such that the contractor is allowed to pursue a claim for damages caused by project delays:

  1. where the delays are caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct;
  2. where the delays are uncontemplated;
  3. where the delays are so unreasonable that they constitute an intentional abandonment of the contract by the contractee; and
  4. where the delays result from the contractee’s breach of a fundamental obligation of the contract.

Any attack upon a no-damages-for-delay clause, in light of delays caused by the  COVID-19 crisis, will likely focus on the second exception which allows such claims where the delays are “uncontemplated”.

In New York, whether a delay is “contemplated” takes into consideration the parties’ expectations at the time the contract was made, and whether the condition causing the delay was “reasonably foreseeable”. If the contracting parties had no reason to suspect that the delay-causing condition was a potential obstacle to the project, then New York courts may conclude that these delays simply fall outside the parameters of the contract – including the no-damages-for-delay clause found within that contract.

Thus, disputes are likely to arise concerning whether the COVID-19 pandemic was “anticipated” or not. On the one hand, the spread of the disease, and the extreme efforts undertaken to effect social distancing – and social isolation – have occurred, literally, overnight. It is hard to imagine that the extent of the crisis, and the ripple effects felt by every corner of the construction industry, were foreseen by contractors and contractees at any time prior to March 2020. On the other hand, widespread work stoppages, due to factors other than a global pandemic, are nothing new. Furthermore, “acts of God” are often explicitly addressed in a contract, through the use of a force majeur clause or something of the like. Such a clause, if triggered, often suspends performance by all parties, as opposed to shifting the risk of this “act of God” upon the contractee alone. Thus, contractees may argue that, by including a force majeure clause, all parties anticipated the manner in which such an event should be treated under the contract.

Regardless of the outcome of the debate, it is clear that delay claims will be on the rise – as will litigation over who should bear the cost of delays that result from COVID-19.

Does a No-Damage-for-Delay Clause Also Preclude Acceleration Damages?

Christine Fan and Ted Gropman | Pepper Hamilton

Construction contracts often include a “no damage for delay” clause that denies a contractor the right to recover delay-related costs and limits the contractor’s remedy to an extension of time for noncontractor-caused delays to a project’s completion date. Depending on the nature of the delay and the jurisdiction where the project is located, the contractual prohibition against delay damages may well be enforceable. This article will explore whether an enforceable no-damage-for-delay clause is also a bar to recovery of “acceleration” damages, i.e., the costs incurred by the contractor in its attempt to overcome delays to the project’s completion date.

Courts are split as to whether damages for a contractor’s “acceleration” efforts are distinguishable from “delay” damages such that they may be recovered under an enforceable no-damage-for-delay clause. See, e.g., Siefford v. Hous. Auth. of Humboldt, 223 N.W.2d 816 (Neb. 1974) (disallowing the recovery of acceleration damages under a no-damage-for-delay clause); but see Watson Elec. Constr. Co. v. Winston-Salem, 109 N.C. App. 194 (1993) (allowing the recovery of acceleration damages despite a no-damage-for-delay clause). The scope and effect of a no-damage-for-delay clause depend on the specific laws of the jurisdiction and the factual circumstances involved.

There are a few ways for a contractor to circumvent an enforceable no-damage-for-delay clause to recover acceleration damages. First, the contractor may invoke one of the state’s enumerated exceptions to the enforceability of the clause. It is helpful to keep in mind that most jurisdictions strictly construe a no-damage-for-delay clause to limit its application. This means that, regardless of delay or acceleration, courts will nonetheless permit the contractor to recover damages if the delay is, for example, of a kind not contemplated by the parties, due to an unreasonable delay, or a result of the owner’s fraud, bad faith, gross negligence, active interference or abandonment of the contract. See Tricon Kent Co. v. Lafarge N. Am., Inc., 186 P.3d 155, 160 (Colo. App. 2008); United States Steel Corp. v. Mo. P. R. Co., 668 F.2d 435, 438 (8th Cir. 1982); Peter Kiewit Sons’ Co. v. Iowa S. Utils. Co., 355 F. Supp. 376, 396 (S.D. Iowa 1973).

Second, a contractor may recover acceleration damages despite a no-damage-for-delay clause if the owner or general contractor denies the contractor’s valid request for a time extension. No-damage-for-delay clauses typically provide that the only remedy for a contractor is an extension of time. Should the contractor be deprived of this sole remedy under the clause, the owner and/or general contractor’s denial of the request would constitute a material breach of contract, thus allowing the contractor to recover damages. Multiple courts have allowed the recovery of damages in these instances. See, e.g., Cent. Ceilings, Inc. v. Suffolk Constr. Co., Inc., 91 Mass. App. Ct. 231, 237 (2017) (precluding the general contractor from invoking the no-damage-for-delay clause where it failed to grant an extension of time to the subcontractor); Watson Elec. Constr. Co., 109 N.C. App. at 199 (holding that damages for breach of contract are recoverable despite a no-damage-for-delay clause if the owner fails to properly grant an extension of time for its delay).

Finally, acceleration damages that do not flow as a consequence of delays may also be recoverable. Contractors may try to characterize the costs incurred as costs arising solely from impacts or disruptions to their performance, and not acceleration efforts to recover project delays. This approach has received inconsistent results across jurisdictions. For example, the U.S. Court of Appeals for the District of Columbia Circuit recognized the distinction between claims for delay versus disruption and awarded disruption damages to a contractor despite the presence of a no-damage-for-delay clause. United States Indus. v. Blake Constr. Co., 217 U.S. App. D.C. 33 (1982). Similarly in Massachusetts, a court found that a no-damage-for-delay clause precluded only damages that are attributable to delay and did not bar damages that would have been incurred even if performance had been timely. Paul Hardeman, Inc. v. United States, 406 F.2d 1357, 1362 (U.S. Ct. Cl. 1969). Yet, a separate court in Massachusetts found that working piecemeal, out of sequence, and in winter weather constituted delays, and thus any damages incurred were still precluded under a no-damage-for-delay clause. B.J. Harland Elec. Co. v. Granger Bros., Inc., 510 N.E.2d 765, 767 (Mass. App. Ct. 1987). As acceleration is often closely linked to delays on a project, using this approach to bypass the no-damage-for-delay clause is certainly far from perfect.

In conclusion, contractors could face hurdles in trying to recover acceleration damages under a valid no-damage-for-delay clause. Some of the methods available to bypass the clause include invoking any of the recognized exceptions to the clause or pursuing breach of contract damages for the owner or general contractor’s denial of a time extension. However, based on the inconsistent rulings across the courts, the results of these efforts are largely jurisdiction-specific.

Damages For Delay-An Update

Henry L. Goldberg | Moritt Hock & Hamroff | February 12, 2019

One of the most significant developments in construction law of late concerns an issue I have been actively involved in for some time. It is a coordinated, industrywide effort to eliminate “no damages for delay” clauses for public construction. As with the federal government, and many other states, delay damages must be recognized when the acts and omissions of the public owner interfere with the progress of work.

I have good news and bad news on this front. First, the current industry legislative bills to “outlaw” no damages for delay (modeled in large part from the language of the current New York State Office of General Services contract) was very well received in Albany.

Both Houses of the legislature clearly “got it.” The bills passed both the Senate and Assembly overwhelmingly. In fact, the Senate vote was unanimous!

The bad news is that Governor Cuomo just vetoed the bills on December 28, 2018. This cannot be tolerated! The Governor’s veto message was largely predictable: much rationalization and misunderstanding concerning the unfair abuse of “no damages for delay.” Why does the State fear the recognition of delay damages caused by its own acts and omissions? Should not the party causing damages bear its fair share of this burden? Is it not the government in a better position to take the financial hit, particularly of its own making, rather than a private company?

Take, for example, these meaningless statements from the heart of the Governor’s veto message. None of the statements are true:

This (vetoed) bill also suffers from certain technical deficiencies. For example, it would broadly permit recovery for delays “caused by the owner’s acts or omissions” regardless of whether costs claimed are reasonable. By requiring public entities to place such clauses in all construction contracts, with no ability to define the terms or negotiate the circumstances under which certain costs may be compensable, the State and other public entities would be exposed to costly and complex litigation over the meaning and application of these terms and further delay projects while these issues are arbitrated or litigated.

One can only wonder if statements such as these are caused by an actual or feigned lack of understanding. I fear the latter. However, the harsh results are the same either way.

It is our plan now not to let the strong support of the legislature be dissipated and wasted. We will not wait for this year’s new legislative session to progress, but will immediately reach out to the Governor’s staff to see if some accommodations can be worked out politically. I can attest to the fact that the Governor’s legal staff failed to accept our repeated offers to help them become better informed on the issue. We will again be reaching out to them, perhaps using the veto message as a road map, laying out the foibles of the message and the absolute need for relief. Any politician who claims to be a friend of the industry should do no less. They should want to be assured that they are well-versed before taking the drastic action of vetoing such critically necessary remedial legislation. The construction industry is far too important throughout the state.

While on the topic, and in case there’s any doubt as to the urgency of this reform legislation, a New York appellate court recently ruled in the matter WDF, Inc. v. Columbia University and Lend Lease and callously affirmed the dismissal of the contractor’s entire delay claim based solely on the “no damages for delay” clause provision of the contract. The dismissal was narrowly based on the argument that the claimant did not set forth sufficient factual allegations supporting its claim that such “alleged delays fell within the exceptions to the ‘no damages for delay’ rule.” This was extremely harsh. Before a court deprives a party of its day in court, it should tread very carefully. Strict lawsuit pleading requirements have never been the modern rule in New York State, but rather, what we lawyers call “notice pleading,” which merely requires giving the adverse party a fair sense of what the claim against it involves.

Ill-founded, or just plain wrong, decisions such as this would be completely obviated if the legislation we seek was enacted. We need a declaration that “no damages for delay” clauses are unenforceable in New York as against public policy.

MH&H Commentary

The industry must and will continue its efforts to combat the harm caused by sweeping “no damages for delay” clauses in public contracts. That effort (coupled with opposition to strict claim notice and damage record keeping requirements which I have referred to on these pages as “contractor forfeiture enhancement devices” or “COFEDs”) have changed the legal environment in the industry. The risks are too great for the contracting community to allow the government to shift all risk to contractors or subcontractors. This is particularly so, when the government is usually the source of the problem with deficient plans and specifications, as well as, sub-standard project supervision and coordination.

Finally, I would like to extend our sincere thanks to all of you who responded to the call to reach out to your own Assemblymen or Senator at the grass roots level. The overwhelming votes in support of our bills were hard fought and your efforts were indispensable. Thanks. I promise you’ll be hearing from us again soon.