Two recent cases highlight the harm caused by “no damages for delay” clauses. Both are well-reasoned decisions from Maryland that survey the law from many states. As such, they are worth knowing, particularly because the uncompensated delays were outrageous.

Some background

One of the oldest no-damages provisions is the “force majeure” clause (discussed in my April 2001 Electrical Contractor article, “Acts of God and of Lesser Beings”). There is a certain superficial fairness in the idea that where a delay arises from uncontrollable forces—wars, strikes, cataclysmic weather—both sides are innocent, the delay hurts them both and a time extension to complete the contract is the sole remedy.

The general no-damages clause is harder to defend. Such a clause is not permitted in standard federal government contracting. Some states also will not allow the clause in state or local government contracts. Contracts between private parties, however, are another story.

The basic no-damages clause

When the generic “no damages for delay” clauses arose, they provided that in the event of certain delays that are not the fault of the contractor, the contractor would be granted a time extension only, but no money. The equities of such an agreement can be argued, but one of the motivators was a desire not to pay for something that did not increase project value.

Delay damages are real. I represented a client whose project should have been completed before winter. Owner-caused delays shut down the project for months until crews could remobilize in the next spring. During the shutdown, there were still equipment rental costs, overhead, job maintenance and protection, and wage and material escalations. In the end, however, the owner got the same building as originally planned, but unimproved and late. Understandably, the owner did not want to pay for the costs of the delay.

Because a strict, literal application of the clause can have severe financial repercussions for the contractor, the courts have invented “exceptions” to help contractors. The results fit under an old expression: “Hard cases make bad law.”

The exceptions

Variations in terminology aside, the exceptions to a “no damages” clause have been: fraud, active interference, delays beyond the contemplation of the parties and unconscionability. Practically speaking, all of these exceptions are really unforeseen delays (using an argument of “interference” or “acceleration” instead of a claim of delay may be addressed another time).

The exceptions come from cases where a one-year job was stretched out to six years, or the job was delayed because the owner kept running out of money, or because the drawings were so poorly assembled that the job was built on change orders. Judges and juries heard these absurd facts and ruled against the owner, but not always.

One group of cases states unequivocally that a no damages clause should not be read literally. Instead, delay damages can still be recovered on a showing of bad faith, malicious conduct, or a breach of “a fundamental obligation of the contract.” These terms are not easily defined. Also, delay damages are available where the delays are so substantial as to establish an “abandonment” of the contract.

Another group of cases states unequivocally the opposite. For example, a Wisconsin decision contained a logical and persuasive rationale for why “delays beyond the contemplation of the parties” should never be an exception to the no-damages clause.

“Indeed, the adoption of a ‘no damage for delay’ clause shows that the parties realize that some delays cannot be contemplated at the time of the drafting of the contract. The parties included the clause in the contract in order to resolve problems conclusively should delays occur.” John E. Gregory & Son, Inc. v. A. Guenther & Sons Co., 432 N.W.2d 584, 587 (Wisc. 1988)

The reasons why some jurisdictions go one way or the other is more of a philosophical inquiry. At the heart of the issue is the ancient debate between law and equity: the freedom to contract against fairness (see my article “The Parted Oceans” in the May 2004 issue of Electrical Contractor). From a business perspective, a contractor will sign an agreement with a no-damages clause because he is willing to take the risk rather than not take the job.

The Maryland cases

Until recently, Maryland courts had not ruled on whether the New York/Washington/Alabama/Delaware/D.C. “exceptions” approach would be adopted or whether it would be the literal approach of Wisconsin/Texas/Utah/Illinois/Massachusetts.

In State Highway Administration v. Greiner Engineering Sciences, Inc., 577 A.2d 363 (Md. App. 1990), the facts were these: Greiner was retained to perform highway design services in late 1979 with an estimated 15-month duration. The highway administration, however, had repeated funding “uncertainties” leading to regular stop work orders. Completion was finally achieved late in 1986. A 15-month job became a 75-month interrupted job.

Greiner had an actual man-hour overrun, translating to $167,000 (the contract was “cost plus fixed fee with a guaranteed maximum”). There appeared to be little debate that the overrun was directly related to the stop-and-start efforts required of Greiner by the work stoppages.

The no damages clause in Maryland is not included in state construction contracts, but it is allowed in a design services contract. The clause stated, in part, “[N]o charges or claims for damages shall be made by [the architect] for any delays or hindrances, from any cause whatsoever... .”

The court held that this clause was not ambiguous. Further, the “not contemplated by the parties” exception is not recognized in Maryland. Accordingly, the delay here, which amounted to a 500 percent time extension, would not support a claim for damages. Only proof of fraud could avoid the clause.

Greiner was followed and reaffirmed in U.S. ex rel. Tennessee Valley Marble Holding Co. v. Grunley Construction (D.D.C. 2006). In Grunley, the owner delayed in providing field measurements for marble to be used at the National Archives (by the way, the quarry was the same one that provided the original marble for the historic building).

During the delay, marble pieces were made out of sequence and a change in quarry ownership increased the cost of production. The extra costs were characterized as “impact” damages, not delay damages.

That word choice had no effect on the outcome. But for the delays—they were caused by late detailing of the materials—there would have been no claims, so they are delay damages, barred by contract.

The new ‘no-damages’ clauses

The clause in the Grunley case is of a new variety, and it is worrisome. It provides: “A time extension shall be the sole and exclusive remedy ... for delays or suspensions caused by Contractor ... .”

The clause does not look much worse than most so far. But it goes on: “ ... even if the delays or suspensions were: (1) of a kind not contemplated by the parties, (2) amounted to an abandonment of the contract, or (3) were caused by active interference.”

What? Even if the delay was caused by the owner abandoning the contract? Obviously, the clause was drafted with New York and Delaware in mind. The only “exceptions” not addressed by this clause are fraud and willful misconduct.

Why would anyone agree to this language? The answer, most probably, is that the subcontractor did not read it. Imagine the consequences.

You have a fixed price contract with a one-year schedule. Then, the general contractor tells you not to start for, say, three years. Or the owner, for financial reasons, decides to stretch out completion of a subdivision development. These horror scenarios could ruin a subcontractor.

Conclusion

Read each contract to see if there is a “no damages for delay” provision. Before you sign, analyze the delay provisions. What scenarios can you imagine? What is the worst case? Does it make sense to run the risks? Don’t bet your company on a surprise “no damages for delay” contract.       EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.