June 2004 |
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In This Issue
Exceptions Do Exist for the "No Damages for Delay" ClauseDoes a contractor have the ability to recover costs resulting from a project delay when the contract includes a "no damages for delay" clause? The answer is yes, if certain conditions are satisfied. In many states, the contractor can defeat the clause by showing that the other party has breached the implied covenant of good faith and fair dealing or that the delay was not contemplated by either party at the time the parties entered into the contract. Frequently, construction contracts contain a "no damages for delay" clause where the contractor waives any claim for damages resulting from a project delay even when the contractor is not at fault for the delay. When a "no-fault" delay occurs, the contractor's sole remedy is an extension of time. The purpose of the "no damages for delay" clause is to place the risk of the contractor's additional costs resulting from the delay squarely on the contractor's shoulders. At the project's initial stages, the contractor's focus is often on meeting the schedule because of today's increased demand for fast track projects. Accordingly, the likelihood of a substantial delay and the risks involved are often the furthest thing from the happily optimistic contractor's mind when facing an aggressive schedule. However, the total cost resulting from a delay can be substantial due to the high costs of additional overhead, equipment, and remobilization. Contractors understanding a "no damages for delay" clause and when it is unenforceable can better protect themselves against the risks associated with the clause. Recently in J.A. Jones Construction Co. v. Lehrer McGovern Bovic, the Supreme Court of Nevada listed three exceptions that a contractor can use to defeat the "no damages for delay" clause. This case involved a structural concrete contract on a large Las Vegas casino job with a "no damages for delay" clause. In a cost savings effort to reduce the concrete contractor's initial bid, the construction manager agreed to (1) complete certain site preparation requirements before the concrete work was to commence; and (2) allow the concrete contractor sufficient access to complete the work in a manner that would allow for additional cost savings. However, the agreed upon site preparation and the access did not take place. Because of the numerous site logistic problems, the project took 11 months to complete rather than the contractual three month duration. Hoping to recover damages resulting from the eight month delay despite the "no damages for delay" clause, the concrete contractor argued that exceptions exist for a "no damages for delay" clause under certain circumstances. The Supreme Court, after reviewing the issue, including the amicus brief filed by Kegler, Brown, Hill & Ritter on behalf of the Subcontractor's Legal Defense Fund of the American Subcontractor's Association, agreed and held that exceptions to the "no damages for delay" clause do exist when the implied covenant of good faith and fair dealing has been breached. The court extended the implied covenant of good faith and fair dealing to reach the following three specific exceptions:
Whether the concrete contractor can ultimately prevail and recover damages will depend on whether he can show that the construction manager failed to act in good faith when agreeing to the site preparation and access requirements. While the Nevada Supreme Court did list three exceptions to the "no damages for delay" clause, the court did not extend the list of exceptions to include delays not contemplated by the parties at the time they entered into the contract. The court noted that the contractor can adjust its bid accordingly to reflect the risk of loss for unforeseen delays when the contractor knows it cannot recover costs associated with such delays. How a contractor can accurately price some event that he cannot yet foresee is beyond the contemplation of this author. Ohio also allows a contractor to recover delay damages despite a "no damages for delay" clause. Under O.R.C. §4113.62, "no damages for delay" clauses are unenforceable when the delay was caused by the owner's "actions or inactions". Unlike Nevada, Ohio's case law also allows an exception for delays not contemplated by the parties at the time they entered into the contract. In Dugan & Meyers Const. Co., Inc. v. State of Ohio Dept. of Administrative Services, a contractor's recovery of damages was not barred by a "no damage for delay" clause when the court found that the delays and additional expenses were beyond the contemplation of the parties at the time of contracting. The net result of these cases reveals that (1) a contractor can recover delay damages despite a "no damages for delay" clause under certain situations; and (2) different states use different criteria when determining a "no damages for delay" clause is unenforceable. Certain states, like Nevada, will allow the exception to the "no damages for delay" clause when the other party has failed to act in good faith. Other states like Ohio, will also grant the exception when the delay had not been contemplated by the parties at the time of contracting, or when the delay has been caused by the owner or its agents. The distinction between the Nevada and Ohio exceptions should not be understated. In Nevada, lacking a showing of bad faith on behalf of a contracting party, a contractor will be more likely to bear the loss for any unforeseen delays. However, in Ohio, the contractor can recover its losses for an unforeseen delay, even though neither party has acted in bad faith, so long as the delay was beyond the contemplation of the parties at the time of contracting. Contractors to Take Cut on Claim InterestOhio has long had a statute which provides prejudgment interest on contract claims at the generous rate of ten percent per annum. However, a recent bill (Sub. H.B. 212) passed and became law effective June 2, 2004, substantially reducing that ten percent per annum to a rate determined by the Tax Commissioner based upon the federal short-term rate instead. This will result in much smaller contractor interest recoveries on claims and provide much less incentive for public authorities to timely resolve those claims. The question arises as to what happens to existing claims with respect to this law change. Sub. H.B. 212 has been drafted in a way so that any cases pending in the courts as of the effective date of the Act (June 2, 2004) shall result in the recovering party receiving ten percent interest until that date and the lower short-term federal rate thereafter. With respect to claims that are not filed in Court by the effective date, it is believed that these claims will only result in federal rate interest from start to finish. This means that contractors and other claimants have a real financial incentive to file any significant pending claims in Court before the June 2 deadline. This lower interest rate (when no interest rate is specified in the contract) also emphasizes the need on private work (where contract language can be negotiated) for contractors and subcontractors to insert an appropriate interest rate in the contract itself, rather than remaining silent and simply relying upon the statute to recover interest in the event any sum is "past due." In this way, contractors and subcontractors can preserve their right to recover a competitive rate of interest rather than default to the statutory federal short-term rate, currently a much lower figure. Ohio Supreme Court Clarifies Prompt Payment ActUntil the Ohio Supreme Court rendered its April 2004 decision in the Masiongale Elec. v. Construction One case, there was no definitive word as to what constituted a "disputed lien or claim" to allow withholding of a subcontractor's money when the general contractor had received payment from the owner. The Supreme Court has now partially answered that question in a manner favorable to subcontractors. In the Masiongale case, the general contractor had withheld attorney's fees and mechanic's lien release bond premiums from the payments made to the subcontractor, claiming that the subcontractor breached the lien waiver and forum selection provisions of the subcontract. The Supreme Court found that these assertions were procedural in nature and unrelated to the substantive work performed by the subcontractor, and held that the only proper justifications for withholding payment under the Prompt Payment Act must relate to claims involving the performance of work itself. This decision means that subcontractors are more likely to prevail on Prompt Pay claims when the excuse for non-payment does not relate to the actual work itself. Firm NewsGregory gives presentations, named to panelDon Gregory recently spoke to the International Glass Association in Las Vegas and to the American Subcontractors Association in San Juan, Puerto Rico. He has also been named to the Large Complex Panel for Arbitrators of the American Arbitration Association. New attorney joins Kegler BrownRod Davisson, a subcontractor before he began his legal career and the current mayor of a central Ohio municipality, has recently joined the firm to practice construction law. Rod will work closely with Don Gregory, representing various clients in the construction industry. Firm receives award for legal servicesKegler Brown has received the 2003 National Legal Services Award from the American Subcontractors Association for its work on Retainage Reform. Gregory honored as a leading lawyerDon Gregory was recently recognized by his peers as one of Columbus' top lawyers in Business First. In addition, he was named one of "America's Leading Business Lawyers" for 2004-2005 by Chambers USA. This is the second year that Gregory has received such designation from Chambers. CreditsKegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group. To subscribe to any Kegler Brown publication, please use our Subscribe Form. To unsubscribe from any Kegler Brown publication, please use our Opt-Out Form. This publication, as well as an archive of previous publications, is also available from our Publications Archive. The Construction Law Newsletter is designed to provide general information about the subjects discussed. It is not meant to be all-inclusive or comprehensive. Kegler Brown is not rendering any legal or professional advice by way of this publication. © 1989-2008, Kegler, Brown, Hill & Ritter Co., L.P.A.
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