Chris Broughton | ConsensusDocs
Introduction:
Under a no-damage-for-delay clause, the owner is not liable for any monetary damages resulting from delays on the project. In lieu of monetary recovery, the contractor’s remaining remedy is a non-compensatory time extension. These clauses are common at the contractor-subcontractor interface as well.
While no-damage-for-delay clauses are enforced in most jurisdictions, some states, either by statute or case law, have limited the enforceability of no-damage-for-delay clauses. Other states have also limited the enforceability of these clauses on state government contracts, and a select few have outlawed them on all projects regardless if they are publicly or privately owned. Additionally, for subcontractors on federal projects, the Miller Act may provide a way to avoid no-damage-for-delay and recover against the general contractor’s payment bond.
This article provides an overview of no-damage-for-delay clauses and the exceptions to enforcement of these clauses. However, due to the consequences of a no-damage-for-delay clause, it is important to know the terms of your contract and the law that governs your project.
Sample No-Damage-for-Delay Clause:
As noted above, an owner or contractor may attempt to prospectively allocate the risk and shift financial responsibility for delay through a no-damage-for-delay clause in the contract.
The ConsensusDocs standard prime and subcontracts do not include a no-damage-for-delay clause. Nevertheless, an example of a no-damage-for-delay clause is as follows:
Contractor agrees that it shall make no claims against Owner for damages, charges, interest, additional costs or fees incurred by reason of delays or suspension of work caused by the Owner, other parties under the Owner’s control, or any other cause in the performance of its work under this Agreement. Contractor’s sole and exclusive remedy for delays, stoppage, or suspension of the work is an extension of time equal to the duration of the delay, stoppage, or suspension to allow the Contractor to complete its work under this Agreement.
A no-damage-for-delay clause like the sample above will likely be enforced in most states. However, as shown below, there are important exceptions that can impact your ability to recover your on project.
Frequently Recognized Exceptions to No Damage for Delay:
While most states will enforce a no-damage-for-delay clause on a construction contract, there are important exceptions that have been developed through the court decisions that can impact your ability to recover your delay costs. Nevertheless, the following are the most common exceptions to a no-damages-for-delay clause:
1.Delays that resulted from the benefiting party’s bad faith, active interference, fraud or misrepresentation. This is the most widely adopted exception to no-damage-for-delay clauses. Courts will not allow a party to benefit from its own fraud, misrepresentation, bad faith, or active interference with the work of the other contracting party. Aside from invalidating a no-damage-for-delay clause, fraud, misrepresentation, bad faith may also give rise to a breach of a party’s implied duty of good faith and fair dealing.[ii] Additionally, other jurisdictions may include gross negligence under this exception as well.[iii]
2. Delays that were of a kind or type not contemplated by the parties. Some jurisdictions have held that no-damage-for-delay clauses will not bar claims resulting from delays that were not reasonably foreseeable or contemplated by the parties at the time contract. The New York Court of Appeals stated that even broadly written no-damage-for-delay clauses will encompass only delays “which are reasonably foreseeable, arise from the contractor’s work during performance, or which are mentioned in the contract.”[iv] An example of a delay “not contemplated by the parties” is an indefinite suspension of the work after an unknown methane gas condition was discovered on site.[v] However, it is important to note that there are many jurisdictions that do not recognize this exception. [vi]
3.Delays that were so unreasonable that they constituted an intentional abandonment of the contract by the benefiting party. A no-damage-for-delay clause will not be enforced where the party benefiting from the clause abandons its contractual obligations. A party’s abandonment can be express or inferred from the benefiting party’s conduct and attendant circumstances surrounding performance. Importantly, abandonment can be inferred where the delays are so “unreasonable in length or duration that they amount to an abandonment of the contract.”[vii] For example, a court found intentional abandonment where the owner issued significant design changes that fundamentally altered the work and delayed the project by over two years. [viii]
4. Delays resulting from a fundamental breach of contract by the benefiting party. While recognized in many jurisdictions, the exception for material breach is less frequently applied because the no-damage-for-delay clause is intended to encompass “garden-variety” delays such as failing to timely provide materials. [ix] To qualify as a “fundamental breach,” the actions of the benefiting party must be a “complete failure of a condition precedent to performance” or “completely frustrate the performance of one of the parties, not merely delay it for a time.” [x]
The cases and examples are discussed above to provide a general overview of the most commonly applied exceptions to no-damage-for-delay clauses. This is not exhaustive, and other states may recognize their own exceptions to no-damage-for-delay. Thus, it is important to understand which exceptions apply and how they are applied under the law that governs your contract.
Additional State Statute Exceptions
In addition to the exceptions listed above, many states have enacted statutes that further limit or prohibit the enforceability of no-damage-for-delay clauses.
Public Contracts
In particular, some states have enacted limitations or exceptions on no-damage-for-delay on state government contracts, where the clause would absolve the government entity of any monetary liability for delays. For example, in Louisiana, no-damage-for-delay clauses are void on public projects if it “purports to waive, release, or extinguish the rights of a contractor to recover… for delays in performing such contract, if such delay is caused, in whole or in part, by acts or omissions within the control of the contracting public entity.” [xi] Virginia’s and Colorado’s statutes prohibiting no-damage-for-delay clauses on contracts between the public entity and contractor have similar language as well. [xii] North Carolina also prohibits no-damage-for-delay clauses on public contracts between the government owner and the prime contractor. [xiii]
Public and Private Contracts
Furthermore, there are a select few states, notably Kentucky, Ohio, and Washington, which go one step further and prohibit no-damage-for-delay clauses on both public and private projects. [xiv] For reference, here is the operative language in Washington’s statute prohibiting no-damage-for-delay clauses:
Any clause in a construction contract, as defined in RCW 4.24.370, which purports to waive, release or extinguish the rights of a contractor, subcontractor, or supplier to damages or an equitable adjustment arising out of unreasonably delay in performance which delay is caused by the acts or omissions of the contractee or persons acting for the contractee is against public policy and is void and unenforceable. [xv]
Federal Contracts and the Miller Act
On federal procurement projects, the standard contract provisions in the Federal Acquisition Regulations (“FAR”) allow the general contractor to recover for the government’s delay. [xvi] Contrarily, absent requirements for subcontractor compliance, directives, provisions flowed down from the FAR, and other exceptions, subcontracts on federal projects are largely governed by state law. Thus, state law will determine whether a no-damages-for-delay clause is enforceable, and if so, what exceptions will apply for subcontractors on federal government projects. However, there are important protections, including the Miller Act, which may prevent enforcement of a no-damage-for-delay clause against a subcontractor in certain circumstances – particularly where the subcontractor asserts a claim against the general contractor’s payment bond and the no-damage-for-delay clause includes conditional payment or recovery language.
The Miller Act provides an alternate route for recovery for subcontractors on federal construction projects when they are not paid in full by the general contractor. Under the Miller Act, general contractors on federal government projects are required to procure a payment bond for those who provide labor or furnish materials on government contracts valued at over $100,000. [xvii] The Miller Act’s purpose is remedial: to guarantee payment and provide an alternate route of recovery in lieu of the mechanic’s lien right that would exist under state law.
The Miller Act may prevent enforcement of a no-damage-for-delay clause against a subcontractor’s claim against the general contractor’s payment bond if the clause includes conditional payment or recovery language. For example, in United States ex rel. Kitchens To Go v. John C. Grimberg Co., Inc., 283 F.Supp.3d 476 (E.D. Va. 2017), the surety could not assert the no-damage-for-delay provision in the contract to prevent the subcontractor’s recovery of its delay damages against the payment bond because the clause at issue conflicted with the Miller Act. The subcontract’s no-damage-for-delay clause stated that the general contractor would not be liable for any delays on the project beyond its control. Furthermore, the no-damage-for-delay clause included language, similar to a pay-if-paid clause, which conditioned the subcontractor’s recovery for any delay costs on the general contractor’s reimbursement for delay from the federal government. [xx]
The no-damage-for-delay clause violated the Miller Act because a subcontractor’s claim against the payment bond cannot be conditioned on whether the government has paid its general contractor. The court noted that to condition the subcontractor’s recovery on the general contractor’s reimbursement from the federal government would frustrate the Miller Act’s purpose: to guarantee payment for those who perform labor or furnish materials on federal projects.
Additionally, the clause did not operate as a waiver of the subcontractor’s Miller Act claim because it was executed before the subcontractor performed on the project. The Miller Act allows a party to waive its right to recover against the bond if the waiver is “(1) in writing; (2) signed by the person whose right is waived; and (3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.” In this case, the subcontract, which included the no-damage-for-delay clause, was executed well before the subcontractor started its performance on the project. Thus, the no-damage-for-delay clause did not operate as a waiver of its payment bond claim under the Miller Act.
Again, it is important to note that this decision is very specific to the language in the subcontract and the facts of this case. Thus, subcontractors should look to their contract to determine whether the Miller Act will prevent enforcement of the no-damage-for-delay clause against their payment bond claim.
Conclusion
Owners and general contractors may prospectively allocate responsibility and liability for project delays to the other contracting party through a no-damage-for-delay clause. While these clauses are generally enforceable in most jurisdictions, some states, either through case law or statute, have developed important exceptions to the enforceability of no-damage-for-delay clauses, and a select few prohibit these contracts on all public and private projects. Additionally, for subcontractors on federal projects, the Miller Act may prevent enforcement of a no-damage-for-delay clause in certain circumstances – particularly where the subcontractor attempts to recover against the general contractor’s payment bond and the clause includes conditional payment or recovery language. Thus, due to the consequences of a no-damage-for-delay clause, it is important to know the terms of your contract and the law that governs your contract.
Every two-front war cannot be avoided every time. But there are certainly practical ways to reduce and minimize this risk. And adopting some of these approaches can help you avoid a classic blunder (that did not quite make Vizzini’s list).
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See, e.g. J.A. Jones Constr. Co. v. Lehrer McGovern Bovis, Inc., 89 P.3d 1009, 1015 (Nev. 2004); Phoenix Contractors, Inc. v. General Motors Corp., 135 Mich. App. 787, 792 (Mich. App. 1995); White Oak Corp. v. Dep’t of Transp., 585 A.2d 1199, 1203 (Conn. 1991); Dickinson Co., Inc. v. Iowa State Dept. of Transp., 300 N.W.2d 112, 114 (Iowa 1981); W. Eng’rs, Inc. v. State By and Through Rd. Comm’n, 437 P.2d 216, 217 (Utah 1968).
United States ex rel. Williams Elec. Co. v. Metric Constructors, 325 S.C. 129, 134 (S.C. 1997).
John E. Gregory & Son, Inc. v. A Guenther & Sons Co., 147 Wis.2d 298, 304 (Wis. 1988).
Corrino Civetta Constr. Corp. v. New York, 67 N.Y.2d 297, 310 (N.Y. 1986).
See Honeywell, Inc. v. J.P. Maguire Co., 1999 U.S. Dist. LEXIS 1872, at *69 (S.D.N.Y. Feb. 22, 1999).
See U.S. ex rel. Williams Elec. Co., 325 S.C. at 135.
Id. at 134.
See Bovis Lend Lease LMB, Inc. v. GCT Venture, Inc., 6 A.D.3d 228, 229 (N.Y. App. Div. 1st Dep’t, 2004).
Corrino Civetta Constr. Corp., 67 N.Y.2d at 313.
Magco Elec. Contrs., Inc. v. Turner Constr. Co., 2009 U.S. Dist. LEXIS 24499, at *26 (D. Conn. March 26, 2009).
La. R.S. 38:2216(H).
Va. Code. Ann. § 2.2-4335(A); Colo. Rev. Stat. § 24-91-103.5.
N.C. Gen. Stat. § 143-134.
See Ohio Rev. Code. § 4113.62(C); Wash. Rev. Code. § 4.24.360; Ky. Rev. Stat. Ann. § 371.405(2)(c)
Wash. Rev. Code. § 4.24.360
See FAR 52.242-14 (Suspension of Work); FAR 52.242-15 (Stop-Work Order).
40 U.S.C. § 3131 et. seq.
United States ex rel. Kitchens To Go v. John C. Grimberg Co., 283 F.Supp.3d 476, 481-84 (E.D.Va. 2017).
40 U.S.C. § 3133(c).
U.S. ex rel. Kitchens To Go, 283 F.Supp.3d at 483.