Construction Law Briefs

The Risks and Benefits of ‘No-Damages-For-Delay’ Clauses

By Albert B Wolf

Recently, the Colorado Court of Appeals reviewed a case in which a jury had awarded a subcontractor $144,000 for delay damages arising primarily out of scheduling problems on the job that had prevented the subcontractor from the timely completion of its work.

There was a “no-damages-for-delay” clause in the subcontract between the parties that would have allowed the subcontractor only a time extension for delay but no compensation unless the general contractor recovered damages for delay suffered by the subcontractor. Similar provisions are not uncommon in construction contracts and subcontracts.

At trial, the subcontractor offered evidence to show that the highway construction general contractor had altered the scheduling and sequence of the work from that upon which the subcontractor had relied in its bid. That caused the subcontractor to encounter substantial delays and additional costs. The evidence also showed that the subcontractor had to conduct earthwork operations in the midst of traffic, with different equipment than planned. Also, the work that was to precede its work was not timely completed. The subcontractor therefore sued for additional monies to compensate it for its additional costs.

Naturally, the general contractor relied upon the above-mentioned “no-damages-for-delay” clause of the subcontract. The trial court allowed the issue of delay damages to go to the jury. The jury awarded the subcontractor $144,600 in additional compensation. The general contractor appealed.

On appeal, the Colorado Court of Appeals ruled that “no-damages-for-delay” clauses are generally enforceable. However, it ruled that the clauses must be strictly construed because of the harsh consequences that may result.

The court also ruled that several exceptions to the general rule exist, allowing enforceability when there is fraud, misrepresentation or bad faith or, as in the case under consideration, active interference with the subcontractor’s performance such as failure to properly schedule, sequence and coordinate the work on the project, causing out-of-sequence work, a failure to provide access or similar delay-causing actions.

That well-reasoned decision was announced May 1 and may be subject to further consideration by the Colorado Court of Appeals or review by the Colorado Supreme Court.

Contrasted with that Colorado decision, a Kansas federal district court judge more strictly enforced a “no-damages-for-delay” clause by quoting, with approval, the following:

“The policy of the law in general is to permit mentally competent parties to arrange their own contracts and fashion their own remedies where no fraud or overreaching is practical [sic]. Contracts freely arrived at and fairly made are favorites of the law [citation omitted]. None of the parties here involved were neophytes or babes in the brambles of the business world. Both companies, it would appear, dealt in projects involving considerable sums of money; both operated substantial business enterprises; and there is no suggestion that their businesses were not capably managed and profitably operated.”

Those observations, together with other facts, prompted the Kansas court to rule that the subcontractor was bound by the no-damages clause in its subcontract. Its claim for additional compensation for delay was rejected.

The potential harshness of no-damages contract clauses has been recognized by the Colorado legislature. In 1989 it passed a law rendering those clauses unenforceable on Colorado public works projects.

The lessons to be learned from these two cases are that parties to construction-related contracts and subcontracts need to, if possible, avoid or insist upon no-damages-for-delay clauses. If, however, they are present or demanded, the parties should know and understand their possible limitations. In the Colorado case, the subcontractor was obviously careful in preserving the evidence of scheduling, sequencing and coordination problems that allowed it to avoid what otherwise would have been a harsh application of the no-damages-for-delay clause in its subcontract.

Many construction contract-related disputes are resolved by careful contracting, good documentation and thoughtful communication among all parties.

This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive. Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.