Legislative Update

Legislative Update

May 1, 2002

By Dean B. Thomson

Introduction

“No Damage For Delay” clauses have caused contractors headaches for decades. The author of this month’s Briefing Paper drafted legislation which banned use of these clauses on public projects, and thanks to the lobbying efforts of the Minnesota Chapter of the AGC, that legislation was recently passed into law by the Minnesota legislature. See Minn. Stat. § 15.411.

Background

Delays can increase the cost of your work by extending your field office expenses and equipment rentals or pushing your work into an unanticipated, more expensive construction season. The party responsible for causing the delay to your work is liable for the extra costs that you suffer.

Many public Owners attempt to avoid the consequences of the delays that they cause by inserting what are known as “No Damage For Delay” (“NDFD”) clauses in their contracts. These clauses state that even if the Owner causes the Contractor or its Subcontractors delay, the Owner will not be required to pay damages for the consequences of those delays. A typical NDFD clause reads as follows:

Notwithstanding anything to the contrary in the Contract Documents, an extension in the Contract Time, to the extent permitted shall be the sole remedy of the Contractor for any (i) delay in the commencement, prosecution, or completion of the Work, (ii) hindrance or obstruction in the performance of the Work, (iii) loss of productivity, or (iv) other similar claims (collectively referred to in this Subparagraph as “Delays”) whether or not such Delays are foreseeable, within the contemplation of the parties, or caused by the acts of the Owner or its agents. In no event shall the Contractor be entitled to any compensation or recovery of any damages, in connection with any Delay, including, without limitation, consequential damages, lost opportunity costs, impact damages, or other similar remuneration.

Such a clause shifts the responsibility for delay damages from the entity that caused the delay to the victim of the delay. Because NDFD clauses attempt to relieve a party from the consequences of its own negligence, these clauses have typically been strictly construed by the courts. Nevertheless, NDFD clauses have been enforced in several other jurisdictions. Minnesota’s appellate courts, however, have never ruled on the validity of these clauses or whether there are any exceptions to them. As a result, many public Owners in Minnesota include NDFD clauses in their contract documents, and when Contractors or Subcontractors assert delay claims, the Owners claim that these clauses relieve them of liability for delay damages.

The New Legislation

The construction industry has long criticized NDFD clauses, especially in publicly bid construction projects. Contractors do not have the ability to negotiate contract terms on publicly bid projects, so when they are presented with these clauses, they have to accept them or lose the work. In addition, NDFD clauses violate the basic public policy that entities should be responsible for the consequences of their actions, especially governmental entities.

Tired of seeing its members discount or abandon valid delay damage claims because of NDFD clauses, the Minnesota AGC lobbied for and succeeded in convincing the Legislature to enact a new law to solve the NDFD problem.

Found at Minn. Stat. § 15.411 (the “Act”), the new legislation applies to any “public works contract” with the state, county, city, school district or any other political subdivision of the state for any building or highway work. The Act then states that any clause prohibiting the recovery of damages due to delay, disruption, or acceleration is void and unenforceable if the “delay, disruption, or acceleration is caused by acts of the contracting public entity or person acting on behalf of the public entity for which the public entity is legally responsible.”

Public Owners often attempt to use NDFD clauses to avoid liability when a utility has not timely removed its obstructions from the construction site thereby delaying the Contractor. Notably, the Act states that the public entity cannot avoid damages caused by entities for which the public entity is legally responsible. Typically, public Owners are responsible for ensuring promised access, and are responsible for those entities, such as public utilities, that are acting on the Owner’s behalf to deliver that access. Thus, if the public Owner has promised access by a certain date but a public utility has delayed the Contractor’s start, the Act prohibits a public Owner from using a NDFD clause to avoid paying delay damages to the Contractor.

The Act applies to contracts entered into on or after August 1, 2002 and applies only to public works contracts. Parties are still free to agree to use NDFD clauses on private construction contracts. The Act expresses a general public policy against such clauses, however, so it is likely that Minnesota will strictly construe NDFD clauses when interpreting them in private contracts.

Over the years, courts in other jurisdictions have created several exceptions to the applicability of NDFD clauses, which are useful to remember in cases in which Minnesota’s new Act will not apply.

One such exception provides that abandonment of the contract by the Owner will allow the Contactor to recover delay damages despite the existence of a “no damage for delay” clause. People Exrell Well & Newton v. Craig, 133 N.E. 419, 426 (1921); Cunningham Brothers, Inc. v. City of Waterloo, 117 N.W.2d 46 (Iowa 1962). Yet another exception is that the owner’s “bad faith” nullifies a NDFD clause. Housing Authority of Dallas v. Hubbell, 325 S.W.2d 880 (Tex. Civ. App. 1959) (willful, “unreasoning action” by the owner’s architect constituted bad faith); Castagna & Sons, Inc. v. Board of Education, 173 A.D.2d 405, 570 N.Y.S.2d 286 (1991) (misrepresentation and fraud based on withheld superior knowledge vitiates NDFD clause).

A third exception exists if the damages are of a type not within the contemplation of the parties at the time of contracting. Corinno Civetta Construction Corp. v. City of New York, 67 N.Y.2d 297, 502 N.Y.S.2d 681, 493 N.E.2d 905 (1986); State Highway Administration v. Greiner, 577 A.2d 363 (Md. Ct. Spec. App. 1990). Related to this exception are decisions holding that delays of unreasonable or unforeseen lengths of time fall beyond the scope of a NDFD clause. Hawley v. Orange County Flood Control District, 211 Cal. App.2d 708, 27 Cal. Rptr. 478 (1963); E.C. Knowlan Co. v. State, 227 N.W.2d 323 (Mich. 1975).

Courts also circumvent a NDFD clause if the Owner’s conduct amounts to “active interference” with a Contractor’s operation. Wilson & English Construction Co. v. New York Central Railroad, 240 A.D. 479, 483, 269 N.Y.S. 874, 879 (1934); John E. Green Plumbing and Heating Co. v. Turner Construction Co., 500 F. Supp. 910, 913, (E.D. Mich. 1980), affirmed on other grounds, 742 F.2d 965 (6th Cir. 1984).

Finally, a close reading of the NDFD clause in question may provide relief without having to resort to any of the above judicial exceptions. For example, if the clause only mentions delay damages, a Contractor should be able to recover if it can legitimately characterize its damage claim as one for acceleration or disruption rather than for delay. United States Industries v. Blake Construction Co., 671, F.2d 539 (D.C. Cir. 1982).

Conclusion

Minnesota’s new Act solves the problems caused by NDFD clauses on public projects. The issue of NDFD clauses still exists on private construction contracts, however, so it is useful to remember the above judicially created exceptions to these clauses. Of course, the best solution is not to agree to NDFD contract clauses in the first place.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

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