Exceptions Do Exist for the “No Damages for Delay” Clause
Kegler Brown Construction Newsletter June 1, 2004
Does 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:
- Delays so unreasonable in length as to amount to project abandonment.
- Delays caused by the other party's fraud, misrepresentation, concealment or other bad faith.
- Delays caused by the other party's active interference.
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.