Sunday, July 22, 2012

Delay Damages - Hard to Exclude Even When No Damage For Delay Clause Included in Contract

Delay damages can accumulate quickly and reach substantial amounts. Contractually excluding delay damages is one way that parties address the financial risks of construction delay. Such contract provisions are known as “no damages for delay” clauses. Courts generally do not favor such clauses because these exculpatory provisions may allow a party to escape liability for damages caused by its own acts or omissions.

Read literally, a “no damages for delay” clause can prevent a party’s, e.g., subcontractor’s recovery for a compensable delay caused by the upstream contractor’s breach of contract. As a matter of public policy, though, some legislatures have enacted statutes precluding such literal applications. In response to such statutes and the courts’ strict reading of these clauses, contracts may contain clauses not expressly labeled “no damages for delay” – even though the advantage gained by the upstream party’s use of such clauses is woven throughout the contract.

By blending the effects of a no damages for delay clause with other clauses appearing to give a subcontractor remedies, an upstream party can defeat a subcontractor’s claim for “extra” compensation. However, a court may negate this blending effort by parsing out the no damages for delay clause from other clauses that offer the subcontractor remedies. Then, the upstream party may find itself having to compensate the subcontractor without equal compensation flowing down to that contractor.

Although parties often seek to avoid liability for delay damages, contracting parties also expect to be paid consistent with their contracts. To address the risk that contract pricing rests unfairly on mistaken assumptions, parties to a construction contract may include an equitable adjustment clause providing for a contract price adjustment when unforeseen events beyond a party’s control cause a change in construction costs. Equitable adjustments are particularly significant in long term unit price contracts because many unexpected events can impact the original unit pricing.

When an unforeseen construction delay results in increased costs in a unit price contract, a no damages for delay clause may collide with an equitable adjustment clause. Whether the cost increases associated with such events are delay damages or whether they justify an equitable adjustment in the contract price may not be easy to determine. A recent North Carolina case, Southern Seeding Serv., Inc. v. W.C. English, Inc., 719 S.E.2d 211 (N.C. Ct. App. 2011), illustrates the importance of distinguishing a claim for an equitable adjustment from a claim for delay damages when the contract includes both a “no damages for delay” clause and an equitable adjustment clause. A discussion of that case can be found in Rolly L. Chamber's article at Lexology.com.

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