February 2004
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
Construction contracts often allocate risk between the contractor and the owner in an unbalanced manner, typically weighing heavily in favor of the owner. For example, construction contracts frequently contain liquidated damage clauses entitling the owner to recover a predetermined daily amount if the contractor fails to substantially complete the project by a contractually fixed date. Many of these same contracts, however, fail to allow the contractor a corresponding right of recovery. The contract may instead include a "no damage for delay" clause, expressly barring the contractor from seeking delay damages from the owner.
The New York courts have ruled that "no damage for delay" clauses are enforceable. However, they also have cautioned that such exculpatory clauses should not be read literally or applied absolutely. New York's highest court, the Court of Appeals, has in fact expressly recognized certain exceptions to the "no damage for delay" clauses. Those exceptions allow recovery for: delays caused by the owner's bad faith or its willful, malicious, or grossly negligent conduct; not-contemplated delays; delays so unreasonable that they constitute an intentional abandonment of the contract by the owner and delays resulting from the owner's breach of a fundamental obligation of the contract.
For many years, however, the state courts have been exceedingly reluctant or disinclined to apply the exceptions favorably, except for the most egregious circumstances. This judicial tendency to uphold the delay damage bar and deny recovery now seems to be less of a given. A recent federal case, MacQuesten General Contracting, Inc. v. HCE, Inc., illustrates the willingness of a court to award damages despite the existence of a "no damage for delay" clause.
Background
MacQuesten General Contracting entered into a contract with Palmer Court to construct affordable housing in the Bronx, NY. MacQuesten thereafter entered into two subcontracts with HCE, Inc., one for the performance of foundation work, and the other for the installation of planks and other flooring.
Each month, HCE submitted invoices to MacQuesten for work completed. However, for many of the requisitions, MacQuesten paid an amount less than had been invoiced, with a promise that it would ultimately pay the full amount reflected in the invoices.
Over time, the relationship between MacQuesten and HCE deteriorated. First, HCE encountered a significant amount of unanticipated rock and unsuitable soil as it began excavation for the foundation. Removal of the rock and additional excavation delayed the project for about six weeks and resulted in increased costs to HCE. Second, as the work continued, the gap between the amount invoiced by HCE and the total payments made by MacQuesten grew wider. MacQuesten's promises to HCE that it would substantially reduce the arrearages proved to be illusory because the difference between HCE's invoices and MacQuesten's payments ultimately grew to approximately $1.3 million.
Given MacQuesten's payment practices, HCE informed MacQuesten that it intended to file a lien on the project. In response, MacQuesten refused to allow HCE to return to the site to continue work or to recover its equipment. MacQuesten then brought an action against HCE alleging that HCE had abandoned the project, thereby breaching the contracts and causing damage to MacQuesten. HCE counterclaimed asserting that MacQuesten had locked it out of the work site and had failed to make payment for much of the work that had been performed.
A jury trial was ultimately conducted, with HCE prevailing. Among other things, the jury awarded HCE almost $150,000 in delay damages, characterized as extended overhead and profit. After the jury trial, MacQuesten requested the court to overturn the verdict or order a new trial.
MacQuesten argued to the court that the jury's award of delay damages was improper, principally because it contravened a "no damage for delay" clause contained in the subcontracts and HCE had relied at trial on an impermissible formula for calculating these damages.
Decision
Relying on New York law, the court observed that delay damages may be recovered notwithstanding the existence of the "no damages for delay" clauses. Indeed, according to the court, HCE had presented evidence at trial plainly bringing it within at least two of the recognized exceptions. Much of the delay in proceeding with the project was attributable to the discovery of unanticipated rock that impeded the foundation work. In addition, MacQuesten was tardy in producing revised architectural and shop drawings, which, in turn, inhibited HCE from performing its work. The subcontracts, therefore, did not in and of themselves bar the delay damages that were awarded.
According to the court, however, the proof offered by HCE in support of its claim for delay damages was legally insufficient. The calculation of delay damages based on simplistic, arithmetic formulae is often eschewed and deemed inadequate by the courts. Indeed, the New York Court of Appeals has specifically rejected the use of a formula that simply takes the amount of overhead projected in the contract, transforms that amount into a per diem figure based on the length of the contract, and then multiplies that per diem figure by the number of days that the contractor was delayed.
Here, HCE essentially used a similarly flawed method of calculation. First, HCE solely based its delay damages on the inherently unreliable price elements of its bid. Second, HCE failed to show that the delays actually caused any increase in any specific item of overhead. Finally, HCE did not claim that such "cause and effect" evidence was unavailable. The court accordingly ruled that MacQuesten was entitled to a new trial on the element of damages only.
Commentary
The "no damage for delay" clauses have typically been interpreted and applied by the courts narrowly. These clauses are factually and contractually driven, with the courts less tolerant of such exculpatory clauses when the conduct of the owner is exceedingly egregious, if not outrageous.
The key to a contractor successfully pursuing delay damages when faced with a "no damage for delay" clause is to "bundle" the conduct of the owner and fit it under several of the exceptions, thereby resulting in a multi-exception claim. A "combined" exception, presented as a totality of the owner's behavior, is more likely to be successful in negating a "no damage for delay" clause, provided the facts to substantiate them exist. Any attempt to prove each exception in isolation with limited facts will likely prove to be less effective.
About the author: Mr. Miuccio is a partner in the law firm Goldberg & Connolly and legal counsel to the Construction Industry Council of Westchester and Hudson Valley, Inc. Burt P. Natkins, Esq., senior associate with the firm, assisted in the preparation of this article.