An Overview of Three Major Delay Damages Issues
American Bar Association - Litigation Section 02/09/15 By Kevin M. Long, Eric J. Van Schyndle
Whether during contracting or on the eve of litigation or arbitration, whether representing an owner, a contractor, or a sub, the analysis of delay damages issues can be a minefield for the construction lawyer. This article gives high-level advice about three major delay damages issues.
Liquidated Damages Provisions
Clearly, the most efficient way for an owner (or contractor looking to a sub) to collect for delay occurs through an enforceable liquidated damages provision. Typically expressed in terms of a per diem rate for each day of project delay, the use of stepped or escalating per diem amounts has also been recognized. These provisions offer an easy method for allocation of damages associated with construction disputes, documentation of firm expectations for all parties involved, and avoidance of significant proof issues.
The determination of whether a contractual provision for damages is a valid liquidated damages provision or an unenforceable penalty clause is a question of law. There is no fixed rule applicable to all liquidated damage agreements, and each one must be evaluated by its own facts and circumstances. Many states follow the Restatement (Second) of Contracts (1981), section 356, which provides as follows:
(1) damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on ground of public policy as a penalty.”
United States v. Bethlehem Steel Co., 205 U.S. 105 (1907); Stock Shop, Inc. v. Bozell & Jacobs, Inc., 126 Misc. 2d 95, 481 N.Y.S.2d 269 (N.Y. Sup. Ct. 1984).
Liquidated damages provisions should be “a reasonable approximate of the actual anticipated damages from the loss of use of the project.” Fred A. Arnold, Inc. v. United States, 18 Cl. Ct. 1 (1989). In assessing whether the amount fixed as liquidated damages actually approximates anticipated losses, courts look to when the parties made the contract, not when the contract was breached. Restatement (Second) of Contracts § 356 cmt. B, at 158 (1981). Courts also look at whether or not the proof of actual loss would be difficult to establish. Grossinger Motorcorp, Inc. v. Am. Nat’l Bank & Trust Co., 240 Ill. App. 3d 737, 607 N.E.2d 1337 (1992).
Two practical rules can help clarify this issue. First, drafters should include preamble language stipulating that the parties would be damaged by delay, that exact calculation is difficult or impossible, and that the actual delay is reasonably approximated by the provision. Second, as for the amount, one historical rule of thumb used by some practitioners is to calculate the liquidated damage amount at the rate of $20 to $25 per day per $100,000 of contract price. Ronald L. Wallenfang, “Liquidated Damages for Delay in Construction Contracts,” Wis. Masonry Alliance. This amount approximates the investment value of 7.3 to 9.1 percent if that sum were invested elsewhere, and is based on the theory that one wouldn’t make the investment in the first place if the project didn’t have at least as much value to an owner as an alternative investment.
One sure way to render a liquidated damages provision unenforceable is to make it optional. The majority rule is that optional liquidated damages clauses are unenforceable. Grossinger Motorcorp, Inc., 240 Ill. App. 3d 737; see also Stock Shop, Inc., 126 Misc. 2d 95; Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991). For the minority view, see Avery v. Hughes, 661 F.3d 690 (1st Cir. 2011). The rationale is that, if optional, the clause would be invoked only as a penalty when the liquidated damages exceeded the actual damages.
Finally, disputing who is at fault for the delay can affect the enforceability of a liquidated damages provision. Most courts follow the “modern rule,” which allows the courts to apportion the delay between the contractor and the owner. Robinson v. United States, 261 U.S. 486 (1923); Hutton Contracting Co. v. City of Coffeyville, 487 F.3d 772 (10th Cir. 2007); Calumet Const. Corp. v. Metro. Sanitary Dist. of Greater Chi., 178 Ill. App. 3d 415, 533 N.E.2d 453 (1988). If it is impossible for the court to apportion delay between the owner and contractor, no liquidated damages may be assessed. Ex parte Desmare, 1873 WL 9308 (U.S. 1873); Buckley & Co. v. State, 140 N.J. Super. 289, 356 A.2d 56 (N.J. Ch. 1975). A rule even more hostile to the imposition of liquidated damages holds that if the party seeking them contributed to the delay at all, it cannot recover them. Glassman Const. Co. v. Md. City Plaza, Inc., 371 F. Supp. 1154 (D. Md. 1974); Gen. Ins. Co. v. Commerce Hyatt House, 5 Cal. App. 3d 460, 85 Cal. Rptr. 317 (1970), Busfield v. Unemployment Comp. Bd. of Review, 191 Pa. Super. 43, 155 A.2d 436, 437 (1959); Grand Rapids Asphalt Paving Co. v. City of Wyoming, 29 Mich. App. 474, 185 N.W.2d 591 (1971); Mars Assocs., Inc. v. Facilities Dev. Corp., 124 A.D.2d 291, 508 N.Y.S.2d 87 (1986); V. L. Nicholson Co. v. Transcon Inv. & Fin. Ltd., Inc., 595 S.W.2d 474 (Tenn. 1980).
“No Damages for Delay” Provisions
No-damages-for-delay provisions are common and generally enforceable. Although clear and unequivocal no-damage-for-delay clauses are recognized as valid in most jurisdictions, courts have carved out a number of exceptions.
The applicability of a no-damage-for-delay provision is affected by whether the damages are claimed for delay or for some other reason, such as “out-of-sequence work,” acceleration, or labor inefficiency. Generally, to be enforceable, an exculpatory clause must be clear and unambiguous. If there is any ambiguity in the exculpatory language, the no-damage-for-delay clause likely will be adjudged inapplicable or unenforceable. Williams & Sons Erectors, Inc. v. S.C. Steel Corp., 983 F.2d 1176 (2d Cir. 1993) (no-damage-for-delay clause unenforceable where clause providing for payment of delay impact costs arising from change orders was also in contract); Gayon v. Bally’s Total Fitness Corp., 802 So. 2d 420 (Fla. Dist. Ct. App. 2001) (“exculpatory clauses are enforceable only where and to the extent that the intention to be relieved was made clear and unequivocal in the contract, and the wording must be so clear and understandable that an ordinary and knowledgeable party will know what he is contracting away”); Forward Indus., Inc . v. Rolm of N.Y. Corp., 123 A.D.2d 374, 506 N.Y.S.2d 453 (1986) (holding that no-damage-for-delay clause failed because it was not expressed in clear and unequivocal language, but rather was obscured so as to make it probable that it would escape the reader’s attention).
In at least nine states, no-damage-for-delay clauses in public contracts are void and unenforceable. See Cal. Pub. Cont. Code § 7102 (West 1985); Colo. Rev. Stat. § 24 91-103.5; La. Rev. Stat. Ann. § 38:2216(H); Minn. Stat. Ann. § 15.411 (West 2002); Mo. Ann. Stat. § 34.058 (West); N.C. Gen. Stat. Ann. § 143-134.3 (West 1997); N.J. Stat. Ann. § 18A:18A-41 (West 2000); Or. Rev. Stat. Ann. § 279C.315 (West 2003); Va. Code Ann. § 2.2-4335 (West 2001). In at least two states, a contractual provision permitting damages for delay is mandated (see Ariz. Rev. Stat. Ann. § 34-221(F) (2006); Mass. Gen. Laws Ann. ch. 30, § 39O (West 1973)),and in another two states, the clauses are unenforceable in both public and private contracts (see Ohio Rev. Code Ann. § 4113.62 (West 1998); Wash. Rev. Code Ann. § 4.24.360 (West 1979)).
Another defense to no-damages-for-delay clause is interference by the party seeking to rely on the clause. In Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F. Supp. 376 (S.D. Iowa 1973), the court held that to be guilty of active interference, the public agency would need to commit “some affirmative, willful act, in bad faith, to unreasonably interfere with plaintiff’s compliance with the terms of the construction contract.” Consistent with the foregoing approach, many courts that have found “active interference” have based their conclusion on direct, active, and willful disruption by the owner. See U.S. Steel Corp. v. Mo. Pac. R.R. Co., 668 F.2d 435 (8th Cir. 1982) (“As the name implies, active interference requires a finding that defendant committed some affirmative, willful act in bad faith which unreasonably interfered with the contractor’s compliance with the terms of the construction contract.”). Courts have also struck down clauses based on hindrance, fraud, unreasonable delay, and delays resulting from the contractee’s breach of a fundamental obligation in the contract. Corinno Civetta Const. Corp. v. City of N.Y., 67 N.Y.2d 297, 493 N.E.2d 905, 910 (1986).
Whether the delay is contemplated at the time of contracting is another issue. In McGuire & Hester v. City and County of San Francisco, 113 Cal. App. 2d 186, 247 P.2d 934 (1952), delays were caused by the city’s failure to procure the necessary right of way, which it was contractually obligated to provide. Although the no-damage-for-delay clause stated that no damages would be allowed on account of delays or hindrances from any cause, the court nevertheless refused to enforce this provision because it found that the cause for this delay was not within the contemplation of the parties. A delay not contemplated by the parties was found in Blake Construction Co., Inc. v. C.J. Coakley Co., Inc., 431 A.2d 569 (D.C. 1981), in which a spray fireproofing subcontractor was not able to perform its work because of a series of mix-ups in the sequence of plans prepared by the contractor. The court found that this was a delay not contemplated by the parties and refused to enforce a no-damage-for-delay clause. However, there are a few jurisdictions—such as Maryland, North Dakota, and South Carolina—that take a literal enforcement approach, holding that such an exculpatory clause is enforceable even if the delay is not contemplated by the parties. State Highway Admin. v. Greiner Eng’g Scis., Inc., 83 Md. App. 621, 577 A.2d 363 (1990); Markwed Excavating, Inc. v. City of Mandan, 2010 ND 220, 791 N.W.2d 22 (2010); U.S. for Use & Benefit of Williams Elec. Co. v. Metric Constructors, Inc., 325 S.C. 129, 480 S.E.2d 447 (1997).
Consequential Damages Provisions
Statutes and contractual language will often use the term “consequential damages.” The meaning of “consequential damages,” however, is far from uniform. Two good starting points are the definition in section 715 of the Uniform Commercial Code, and the American Institute of Architects’ definition in AIA form A201 (2007), section 15.1.6. However, there remains substantial uncertainty about the scope of this term. Nationally, courts and commentators have held that consequential damages are those that arise from the intervention of special circumstances not ordinarily predictable. Bramble & Callahan, Construction Delay Claims §12.19[B], at 12-128 to 12-129 (3d ed.). Two cases that thoughtfully discuss consequential damages in the construction setting are Roanoke Hospital Ass’n v. Doyle & Russel, Inc., 215 Va. 796, 214 S.E.2d 155 (1975), and Milford v. Coppola Construction, No. CV030523112, 2004 WL 3090680 (Conn. Super. Ct. Dec. 1, 2004), judgment entered sub nom. City of Milford v. Coppola Const. Co., CV-03-0523112-S, 2004 WL 5470899 (Conn. Super. Ct. Dec. 1, 2004), aff’d, 93 Conn. App. 704, 891 A.2d 31 (2006). See also Ryan Inc. E. v. Toll Bros., 43 F. App’x 601, 604 (4th Cir. 2002); Int’l Fid. Ins. Co. v. Cnty. of Rockland, 98 F. Supp. 2d 400, 416 (S.D.N.Y. 2000); Tenn. Gas Pipeline Co. v. Technip USA Corp., 01-06-00535-CV, 2008 WL 3876141, at *10 (Tex. App. Aug. 21, 2008); Elar Invs., Inc. v. Sw. Culvert Co., 139 Ariz. 25, 676 P.2d 659, 662 (Ct. App. 1983). On construction projects, owners will argue that their extended overhead, lost profits, additional financing costs, and loss of use are usually within the contemplation of contractors as they ponder the possible results of their delays and thus should not be considered consequential. Bruner and O’Connor suggest that “foreseeability” might be viewed more broadly in modern construction contracts than in other commercial contracting relationships for several reasons:
(1) the sophistication of the parties;
(2) the detail with which construction contracts are prepared;
(3) the flexibility built into construction contracts to make changes or to give definition to contract requirements during construction;
(4) the frequent practice of giving contractual definition to the type and amount of damages awarded for certain breaches;
(5) the recognized “hurly-burly” of the construction process; and
(6) the common industry appreciation for the likely consequences of most breaches.
Phillip L. Bruner & Patrick J. O’Connor, Bruner & O’Connor on Construction Law § 19.18 (internal citations omitted).
Thus, when entering into a construction contract, both the owner and contractor should assume that only truly uncontemplated damages will be determined to be “consequential.”
Delay damages will always be one of the most challenging aspects of construction law. We hope the citations above can help you safely navigate through three of the most recurring delay damage issues.