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How to Avoid the Pitfalls of a
“No Damage for Delay Clause”

Shawn R. Farrell, Partner, Construction Group, Cohen Seglias
Pallas Greenhall & Furman PC.

The Delay Damages Bill concerning delay related to claims against public entities passed the NYS Senate on Thursday, June 14.  Currently, the Bill awaits signature by Governor Cuomo.  But if Governor Cuomo signs the Bill, this will not end the disputes centering around what has been commonly referred to as a “No Damage for Delay Clause”.  Meaning subcontractors on private jobs will still be faced with this clause and the Delay Damage bill, no matter how carefully crafted, will be subject to court interpretation.  Therefore, understanding the No Damage for Delay Clause is as relevant today as it always has been.

The typical No Damage for Delay Clause reads as follows:  “Subcontractor agrees that it shall have no claim against Contractor for any loss or damage it may sustain through delay, disruption, suspension, stoppage, interference, interruption, compression or acceleration of Subcontractor’s work (“Delay Damages”) caused or directed by Contractor for any reason, and that such Claims shall be full compensated for by Contractor granting Subcontractor such time extension as it is entitled to as a result of any of the foregoing.”  Crafty general contractors will add to this provision an even more arduous clause:  “If, for any reason, Contractor is nevertheless found independently liable to Subcontractor for damages, such damages, whether grounded in contract, tort or otherwise, and whether characterized as direct, special, incidental, consequential, or otherwise, shall be subject to the following overall limitation upon their aggregate amount, irrespective of the number of separate such claims asserted irrespective of the project:  the aggregate of these costs described as follows . . .”  The contract typically will go on to limit the subcontractor only to premium time directly related to delay, excluding any overhead, and making such payments conditioned upon receipt of these monies from the Owner.

The above language comes from a contract that I recently encountered while representing an electrical subcontractor on a power plant project.  Despite this language, I was able to obtain damages for delay and inefficiencies that totaled in excess of  $10.2 million dollars. The purpose of this article is to tell you how to evaluate if such a result it possible for you!

The three most important issues to consider when evaluating whether or not to litigate  when faced of such a clause are the following:

  1. Venue

Venue refers to whether or not the dispute will be decided by a court (via a bench trial or jury trial) or arbitration.  Typically, this decision is made at the time of contracting, but nothing prevents the parties from negotiating the proper venue after the dispute has arisen.  If the matter is to be decided by a court, it is important to consider whether or not the matter will be filed in federal court of state court.  While a federal court will have to follow New York law, federal judges are more apt to provide a “strict constructionist” view of contract terms and conditions.  Meaning, they often will not consider the business realities concerning: the one sided contract negotiation process faced by subcontractors; cash flow issues; or how a general contractor can actively interfere with the performance of a subcontractor’s work merely through the manipulation of a CPM schedule.  Consequently, subcontractors should be weary of the potential for litigation in federal court with a No Damage for Delay Clause, as they are most likely to enforce them.  (This does not suggest that federal judges are wrong – some agreements should just not be signed).

A New York state court judge will provide a little more latitude then limiting its analysis to the four corners of the contract when considering the No Damage for Delay Clause.  Nevertheless, the best forum for a subcontractor facing this type of clause is arbitration.  In arbitration, the subcontractor can select a knowledgeable construction professional, like an engineer; architect; or attorney with significant construction law experience.  Statistical analysis on arbitration awards confirms that arbitrations are no longer like  “King Solomon”, splitting the baby down the middle.  Arbitrators will enforce terms and conditions of a contract.  That said, they understand the particularities of the construction industry and the negotiating power of a subcontractor in contract formation; as well as the means by which a general contractor can actively interfere with a subcontractor’s work.  These factual events, outside of the contract itself, can affect the enforceability of a No Damage for Delay Clause.

  1. Requesting a Time Extension

A close examination of the No Damage for Delay Clause cited above reveals that in exchange for the waiver of any damages, the subcontractor is entitled to a time extension.  But the clause does not say the subcontractor can be precluded from both time and money.  Therefore, if the subcontractor has requested an extension of time and the general contractor denies that time – the subcontractor may seek all related damages.  Again, this is where the facts surrounding the project can alter the enforceability of a No Damage for Delay Clause.  Consequently, when a subcontractor is being delayed on a project, it must request an extension of time.  Do not fret if the general contractor denies your extension.  If the extension of time is denied, focus on quantification of your delay damages.

  1. The Facts Surrounding the Project Matters

It is a common dilemma with contract interpretation that often the English lacks the specificity required to write an unambiguous contract.  Accordingly, the facts surrounding a subcontractor’s damages for delay are important to the analysis concerning the enforceability of  the No Damage for Delay Clause.  Did the general contractor induce the subcontractor to continue working in an accelerated fashion with the vague promise of payment; did the general contractor pay part of the damages sustained, but not the totality of the damages sustained; did the general contractor provide complete, accurate and timely design.  These are just a few of the factual issues that face a subcontractor and must be evaluated, on a case by case basis, to determine whether or not exceptions to the No Damage for Delay Clause exist.  Obviously, such issues are two voluminous to review in detail in this article.  Nevertheless, it is incumbent upon a subcontractor being delayed on a project to review these issues with its counsel.  Do not wait until the end of the project.  Understanding your rights and writing the correct emails and letters is a necessary step to preserve your claim.  A claim is not like wine, it does not get better with time.

Bear in mind, a contract is nothing more than the “meeting of minds” between the general contractor and the subcontractor.  Both parties must agree to the terms and conditions before a contract is formed.  If you, as a subcontractor, do not believe you waived your claims because you did not contemplate  the events that were thrust upon you during construction, it is worth exploring whether or not your contract precludes the receipt of any additional monies.  Do not accept on face value the enforceability of a No Damage for Delay Clause.  If my electrical subcontractor had accepted such rhetoric, it would be $10.2 million dollars in arrears.

 

Shawn R. Farrell is a Partner in the Construction Group at Cohen Seglias Pallas Greenhall & Furman PC. His diverse experience includes all aspects of construction law, contractual disputes, lien law, bond claims, bid disputes, litigation and dispute resolution. Shawn can be reached at sfarrell@cohenseglias.com or 212.871.7400.