Avoiding the High Costs of Delays
Schedule delays, and their concomitant costs, are an unfortunate reality for many construction projects. For the project owner or general contractor (or even the most remote subcontractor or supplier), the potential for delay is a significant concern. Benjamin Franklin believed that “time is money,” and he was not wrong—at least in the construction context. Delays caused by work performed out of sequence or amidst interruptions can lead to production inefficiencies, lost profits, increased overhead, and additional mobilization and equipment costs. Unsurprisingly, parties to construction contracts have historically responded to the specter of delay damages by jockeying for position before the project has even begun—i.e., during the contract drafting and negotiation process.
LIMITING THE COST OF DELAYS
The inclusion of a no-damage-for-delay clause in a negotiated contract is an effective means of insulating project owners and general contractors (“upstream parties”) from responsibility for delay damages. The clause essentially states that downstream contractors will not be entitled to monetary damages in the event of certain delays. Typically, this is accomplished by explicitly stating that the contractor’s sole remedy will be an extension of time.
In practice, there is endless variation to the form and content of such clauses. Because they are ostensibly negotiated freely, the language changes from contract to contract. Without a doubt, they have been, and probably will remain, one of the most contentious issues in contract negotiations. Shifting the risk of delay costs to subcontractors and other downstream parties is attractive, but the parties downstream understandably dislike expansive clauses that afford no remedy for delays beyond their control. It’s an uncomfortable balancing act, made no less difficult by the variety of laws and court opinions that affect enforceability of such clauses.
Due to their potential to restrict contractor remedies, no-damage-for-delay clauses are not universally accepted. In fact, many states have enacted laws barring the use of such clauses in public works, if not altogether. The majority of U.S. courts, however, accord substantial deference to the freedom to contract. Thus, most courts enforce the clauses, with some commonly recognized exceptions. These exceptions include bad faith or active interference, unreasonably long delays, and delays beyond the intention of the parties, among others.
A TEXAS CAUTIONARY TALE
Because the laws and court history differ from state to state, parties negotiating a no-damage-for-delay clause should be wary of relying upon common-law exceptions as protection against overly broad or onerous language. In some jurisdictions, the exceptions may be severely limited, and in others they may not be applicable at all. A 2012 Texas Fourteenth Court of Appeals case, Port of Houston Auth. v. Zachry Constr. Corp., is a perfect illustration of this danger. In that case, the Port of Houston Authority contracted with Zachry Construction to construct a wharf along the Bayport Ship Channel, which is located near Galveston, Texas. Zachry intended to employ certain construction methods that would allow it to construct the wharf on dry land. Later, Zachry argued the Port of Houston disallowed these methods, leading to substantial project delays.
Zachry argued that the Port of Houston actively hindered its work and thus breached their contract, and it sought recovery of its delay damages in court. The jury agreed with Zachry and awarded substantial damages for the Port’s “arbitrary and capricious conduct, active interference, bad faith and/or fraud.” On appeal, however, the award was overturned, because the no-damage-for-delay clause in the parties’ contract prevented compensation for delay damages, even if the delay or hindrance resulted from “the negligence, breach of contract, or other fault of the Port Authority.”
The appeals court held that “other fault” included intentional interference, and it overruled the trial court’s application of the “bad faith” exception to no-damage-for-delay clauses. Essentially, it held that a party to a construction contract in Texas can “contract around” its own intentional misconduct. While Texas is only a single jurisdiction (and the Zachry decision has been appealed to the Texas Supreme Court), the result is an important lesson for construction professionals in any jurisdiction: Diligence during the contract negotiation process is vital to protect contractor delay remedies.
FINDING THE RIGHT WORDS
The variance between jurisdictions regarding no-damage-for-delay clause enforceability means there is no single solution for proper drafting of such a clause. But, there are a few important principles to keep in mind. First, if you are uncertain of the laws of the state where your project is located, it’s important to consult with an attorney. The courts and laws vary greatly, and in some cases the clauses may be barred entirely. Second, be wary of the tone you are setting if you insist upon broad contract language that exculpates you from your own misconduct. Reasonable limitations on delay damages are more likely to engender good will and cooperation. Alternatively, you may wish to employ a negotiated liquidated damages provision specific to delay damages. For their part, downstream parties should consider pushing back on overly broad clauses—at least prescribing exceptions that do not allow the other party to escape the consequences of its own misconduct. Whatever methods are chosen or negotiation tactics employed, the specific language of the final no-damage-for-delay clause will define the potential remedies for delay. For this reason, the language should be closely considered and actively negotiated by all parties to the contract. ■
About The Author:
David L. Tolin, Jr. is a construction attorney in the Houston office of Ford Nassen (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. His practice focuses on all aspects of the construction process. He can be reached at 281.953.7704 or email@example.com.
Modern Contractor Solutions, May 2013
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Avoiding the High Costs of Delays