September 19, 2014

The Legal and Financial Consequences of Moving to a More Contractor Friendly No-Damage-For-Delay Cause

Holland & Knight; Law360; New York Subcontractor Trade Association Newsletter
Adam J. Paterno | Carl Oliveri

According to the New York City Building Congress, Manhattan is poised to add roughly nine million square feet of new office space to its inventory between 2013 and 2015. If realized, this would be the highest volume of new office space added to New York City over any three-year period since 1990. New construction, plus renovations to older offices, will undoubtedly lead to increased activity in all facets of the New York metropolitan area's construction industry. Since most projects encounter delays, in at least some form, a well-drafted construction contract that addresses delay damages is critical to keeping a project on time and on budget.

No-Damage for Delay Provision

A no-damage-for-delay provision is one way to address delay damages. This type of provision excuses a party to a construction contract from certain liabilities that it would otherwise incur in the event of a project delay. Owners often use no-damage-for-delay clauses to shield themselves from unexpected increased costs that arise as a result of project delays. In return, contractors also often include such clauses to protect themselves from similar exposure in their subcontracts. Recently, the City of New York introduced a new no-damage-for-delay clause in its standard construction contract that makes it easier for contractors to claim delay damages. In doing so, the topic of no-damage-for-delay clauses has received increased attention within the local construction community.

New York's highest court affirmed the enforceability of no-damage-for-delay clauses in Corinna Civetta Constr. Corp. v. City of New York, but also outlined certain exceptions to their use whereby a contractor would be permitted to recover damages. The four exceptions are: (1) delays that are uncontemplated at the time of contract; (2) delays so unreasonable they amount to abandonment of the contract; (3) delays caused by breach of a fundamental obligation under the contract; and (4) delays due to bad faith, fraudulent misrepresentation or willful or grossly negligent conduct. 67 N.Y.2d, 502 N.Y.S.2d 681 (1986). In a separate case, New York’s highest court also made it clear that any type of clause that limit one's liability for willful or grossly negligent acts is void under public policy. Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 461 N.Y.S.2d 746 (1983).

Since Corinna, New York courts have revisited the question of how narrowly these exceptions should be interpreted several times. In Plato Gen. Constr. Corp. v. Dormitory Auth. of State of New York, a no-damage-for-delay clause was difficult to defeat by invocation of an exception. 89 A.D.3d 819, 932 N.Y.S.2d 504 (2d Dep't 2011), app denied 19 N.Y.3d 803, 946 N.Y.S.2d 106 (2012). In Plato Gen. Constr. Corp., Plato (the contractor) contracted to work on renovations at the Brooklyn College Library for the Dormitory Authority of the State of New York (DASNY). Due to a number of owner and non-owner caused delays, Plato completed renovations on the library over 17 months after the anticipated completion date. As a result, Plato, believing the delays were primarily caused by the actions and inactions of DASNY, sued DASNY to recover approximately $16 million in delay damages.

Relying on the no-damage-for-delay clause, DASNY denied liability and counterclaimed for approximately $400,000 in liquidated damages measured from the completion date to the date the library was turned over, less a 115-day extension granted by DASNY through the approval of change orders submitted by Plato. On appeal, the court held that Plato’s allegations regarding DASNY’s failure to properly schedule and coordinate the work amounted to poor planning and administration, which in and of itself would not defeat the enforceability of the no-damage-for-delay clause. The court also held that the project's change-order requirements meant that the parties had contemplated delays at the time of contract and evidence of concurrent delays presented at trial further precluded recovery by Plato. The court concluded that Plato was not entitled to an award of delay damages and awarded DASNY $179,000 on its counterclaim.

Contractor Friendly No Damage for Delay Clause

Up until the end of last year, the City of New York's standard construction contract also contained a stringent no-damage-for-delay clause. However, as a result of the efforts of the members of the New York construction industry, the City of New York and its various agencies are now using a new standard construction contract that contains a no-damage-for-delay clause that is more contractor friendly in that it provides for nine circumstances that entitle the contractor to delay costs. Some of the more notable circumstances are:

  • extended delays caused by the city in reviewing or issuing change orders, or in reviewing and approving shop drawings or delays resulting from the cumulative impact of multiple change orders, if such delays have a verifiable impact on Project costs;
  • extended site unavailability that significantly affects the scheduled completion of the Contract;
  • differing site conditions not reasonably ascertainable on a pre-bid inspection of the Site or review of the bid documents or other publicly available sources and not ordinarily encountered in the geographical area of the site or the type of work being performed; and
  • failure of the city to take reasonable measures to coordinate and progress the work.

In doing so, the city incorporates more than just the four exceptions to enforcement of no-damage-for-delay clauses enunciated in Corrino Civetta, a welcomed change for contractors.

Moving to a more contractor friendly no-damage-for-delay clause carries a number of financial consequences for both parties. For instance, in anticipation of the likeliness of delays, contractors typically frontload costs in their schedule of values in order to better manage project cash flow and add contingencies for delays that they will be unable to recover for. In the absence of an owner-friendly, stringent no-damage-for-delay clause, contractors will no longer have as great of a need to factor in contingencies for such costs, which may incentivize contractors to undertake projects in a more efficient manner. Alternatively, contracts that include clauses for shared savings, milestone awards and other contract specific incentives, will better position contractors to proactively make timely decisions that lead to delivering projects on time and on budget. A reduction in delivery time may help foster goodwill between all parties and make the question of whether a contractor can deliver on the terms of a project a moot point.

Moving away from an owner-friendly no-damage-for-delay clause may also lead to fewer illegitimate or frivolous claims by contractors, increasing the likelihood that those claims that are made will be legitimate, opening up dispute resolution resources and allowing all parties to focus on assessing actual losses. Further, from an income tax standpoint, a legitimate loss deduction is much easier to substantiate during an audit than one that is not. Moving away from an owner-friendly and more stringent no-damage-for-delay clause may lead to an easier and more efficient income tax reporting process for all parties.

As some private owners have already learned, using a more contractor-friendly no-damage-for-delay clause carries benefits as well. First, there will be less initial cash outlay by owners, enabling them to control and monitor funds more closely. This will improve the bid process by lowering costs and allowing proposals to reflect true project costs, which in turn will allow owners to select the more qualified contractor. Another potential benefit to owners is that premium construction firms may be enticed to re-enter the market, giving owners an opportunity to work with name brand contractors and subcontractors as well as to build their resumes with stronger contractors and higher profile projects.

From the external audit perspective, there are various benefits from moving away from an owner-friendly no-damage-for-delay clause. When undertaking the cost confirmation process, there are usually instances whereby the owner and contractor may not agree to an adjusted contract value, amount billed to date and corresponding receivable balances. In order to reconcile these discrepancies, an outside auditor has to undertake a number of procedures that can be time consuming and a drain on the internal resources needed to obtain the proper documentation, resulting in additional audit fees. Moving away from a stringent no damage-for-delay provision may make owners more inclined to respond to the cost confirmations and agree to the contractor’s figures. While this will not alleviate all confirmation discrepancies, it is one less obstacle on the path to a smoother confirmation process. Lastly, taxpayers and other end-users may benefit from this move as the flow through cost to the public for infrastructure, private office, residential or any other project will likely be lower.

As Manhattan enters another construction boom, the city’s move away from an owner-friendly no-damage-for-delay could not have occurred at a better time. Overall, the authors of this article believe that the city’s move is a welcomed development for all parties, but especially for contractors. As some private owners have already learned, allowing recovery for certain delay items is likely to lead to less litigation and more equitable outcomes, leaving all parties better positioned to compete in an increasingly competitive marketplace.

Note: This article also ran in Law360 and the New York Subcontractor Trade Association Newsletter.

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