Inside this Issue

A1 - No-Damages-For-Delay Clause Enforced Even When Owner and Other Contractors Caused Delay
A2 - Prime Contractor that Relied on Subcontract Bid Can Recover Damages Based on Promissory Estoppel
A3 - Design-Build Team Guarantees Energy Performance on GSA Project

Article 1

No-Damages-For-Delay Clause Enforced Even When Owner and Other Contractors Caused Delay

See similar articles: Damages | Delays | No-Damages-For-Delay | Schedule

A no-damages-for-delay clause was held to prevent a contractor from recovering damages for delays even where there was evidence that poor planning and administration by the project owner contributed to delay and there was evidence that work by other contractors adversely impacted the schedule. This case involved a suit by a contractor against the Dormitory Authority of New York for over $10 million. The Authority countersued the contractor for $179,000. Following a bench trial, the trial court awarded judgment in favor of the contractor in excess of $10 million, with the judge finding that the Authority breached the contract by failing to fulfill its duty of scheduling and coordinating the work, failing to have an HVAC contractor in place at the beginning of the project, failing to notify the other contractors of a redesign of the HVAC system that delayed the work, failing to remove all books from the library so the contractor could work, and delaying full access to the project site for several months later than promised. The court found uncontemplated delays were incurred by the contractor but that the contractor was also responsible for some of the delay. This judgment was reversed on appeal – with the contractor getting nothing and the Authority being awarded $179,000. The appellate court held that the trial court erred in failing to enforce the no-damages-for-delay clause of the contract. Plato General Construction v. Dormitory Authority of State of New York, 89 A.D. 3d 819, 932 N.Y.S. 2d 504 (Supreme Ct Appellate Div., 2^nd Dept., 2011).

The relevant language of the contract was explained by the court to be the following:

Section 13.01(A) of the “General Conditions” of the contract provided:

“During the progress of the Work, other contractors may be engaged in performing work. The Contractor [Plato] shall coordinate the Contractor's Work with the work of other contractors in such a manner as the Owner may direct.”

Section 11.02 of the “General Conditions” contained a no-damages-for-delay clause which stated:

“No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner's discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.”

Section 13.01(D) provided:

“Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.”

Section 20.15 provided that Plato could not cancel the contract based upon DASNY's breach thereof, and waived “any and all rights and remedies to which” Plato “might otherwise be or become entitled to because of any wrongful act or omission” of DASNY, except Plato's right to damages. Provisions were made in the contract for changes and extra work.

Delays in the project were attributed to a number of causes. Consolidated Edison Company (hereinafter Con Edison) was installing “chiller lines” to run alongside the site; installation was to take 30 days, but was not completed for six months, interfering with demolition and construction for at least some of that period. Although the contract provided that Plato would have “[c]omplete access to the site after June 1999,” the library was not completely vacated until October 5, 1999. The contract for heating, ventilation, and air conditioning (hereinafter HVAC) was not awarded until August 19, 1999, but the selected HVAC contractor, Precision Mechanical, Inc. (hereinafter Precision), was removed from the project on December 6, 1999, by mutual agreement, because it could not meet deadlines or provide a schedule for its portion of the project. Precision was replaced in January 2000 with Roy Kay, Inc. (hereinafter RKI).

RKI had to provide drawings redesigning the duct work system because the original design based upon DASNY's engineer's drawings was not sufficient to maintain sufficient airflow through the buildings and was not field-verified as to the height of existing beams. Plato claimed that the plans prepared by DASNY's architect were also defective for failing to identify all of the asbestos in the walls, resulting in additional asbestos abatement work which delayed demolition.

Completion of the project was delayed by Plato's failure to complete brickwork in a timely manner, as well as the fact that Plato's subcontractors would not or could not complete their work, requiring Plato to perform much of the interior finishing work itself. Occupancy of the library was not turned over to Brooklyn College until August 28, 2002, 526 days after the contract completion date of March 20, 2001.

Based on the above description of the contract, the trial court found that the contractor was responsible for some delay due to errors in masonry work, and failure of its subcontractors to complete their tasks on time, and concluded that the Authority was responsible for 66% of the 526-day delay and the contractor was responsible for the remaining 34% delay (179 days). On appeal, however, the appellate court held that regardless of who caused the delay, the contractor was not entitled to delay damages. The court said the purpose of the no-damages-for delay clause is to “extend acceptability to a range of unreasonable delay” by the [project owner] and that “the clause exonerates the defendant for delays by inept administration and poor planning.” Although such a clause will not bar recovery where the delays are caused by bad faith or willful, malicious, or grossly negligent conduct, or uncontemplated delays, or delays so unreasonable that they constitute an intentional abandonment of the contract by the project owner, the court found no evidence of any such causes of delay in this case.

Moreover, the court concluded that the contract specifically provided that the contractor could not sue the owner for damages resulting from acts or omissions of other contractors and that such delays were contemplated by the parties in any event and were not recoverable. Even faulty performance and defaults under contractors’ contracts were deemed by the court to be within the contemplation of the parties. For these and other reasons, the court reversed the trial court decision, and held in favor of the project owner against the contractor.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No. 6 (June 2012).

Article 2

Prime Contractor that Relied on Subcontract Bid Can Recover Damages Based on Promissory Estoppel

See similar articles: promissory estoppel | Subcontract Bids

Subcontract bidder is found liable to a prime contractor that relied upon its subcontract bid when preparing the successful prime contract bid. The presumptive measure of damages applicable to promissory estoppel for the general contractor that relies upon a subcontractor’s unfulfilled promise is the difference between the nonperforming subcontractor’s original bid and the cost of the replacement subcontractor’s performance. The dispute arose when subcontract bidder “repudiated its obligations to [prime contractor] and refused to negotiate with [Prime Contractor].” The contractor thereafter contracted with three replacement subcontractors to complete the electrical work for the project and then brought suit against the subcontract bidder on the theories of breach of contract, promissory estoppel, and breach of the covenant of good faith and fair dealing. The trail court granted judgment to the prime contractor under the promissory estoppel cause of action – specifically awarding “expectation” damages which is, according to the Restatement of Contracts, an “attempt to place the plaintiff in the position that he or she would have occupied if the contract had been performed or if the promise had been kept.” The appellate court held that the trial correctly decided that the appropriate measure of damages was the difference between the nonperforming subcontractor’s bid and the bid of the substituted subcontractors that completed the work. Dynalectric Company of Nevada v. Clark & Sullivan Constructors, Inc., 255 P.3d 286 (NV 2011).

Article 3

Design-Build Team Guarantees Energy Performance on GSA Project

By Suzanne H. Harness, J.D., AIA

An article published in Engineering New-Record (ENR) on May 14, 2012 under the title “Fee Holdback Raises Eyebrows” has indeed drawn attention. The article explains that the design-build team on a U.S. General Services Administration (GSA) project being constructed in Seattle agreed that the GSA could withhold 0.5% of the original contract amount, or $330,000, pending the achievement of energy goals. Specifically, the design-builder, architect, MEP consultant, and the mechanical and electrical contractors are all at risk for the achievement of actual energy usage that is 30% less than the ASHRAE 90.1-2007 standard. Measurement will take place over a 12 month period commencing this September. The article did not address whether the retention of compensation is the GSA’s sole remedy for the building’s failure to meet the energy goal. If not waived, other remedies could potentially include recovery from the design-build team of additional energy costs the GSA incurs.

Awarded in October 2009, the project is now 80% complete and the design-build team is optimistic that it will meet the goal, according to comments quoted in the article. The architect speaks positively of the GSA’s process, calling it a “step in the right direction for the industry.” Others might more cynically suggest that the GSA took advantage of a bad economy to force the team to guarantee results. The article notes that competition for the award was fierce, and the design-builder regarded the hold-back as a cost of doing business with the GSA.

The GSA’s approach is diametrically opposed to the recommendations of the American Institute of Architects, which advises both architects and contractors not to guarantee or warrant the achievement of a sustainability goal. The AIA’s 2011 Sustainability Guide explains the obvious: contractors and architects can design and construct a building, but the owner operates it, and the owner’s actions are beyond the control of the design and construction team. If the owner operates the building differently from the assumptions used during design, performance goals will likely not be met, even if the building is perfectly constructed.

The design-builder accepted the risk, and allocated it to the applicable design and construction team members—a sound risk management approach. The design firm typically expects to share its risks with a professional liability insurance carrier, but that coverage may not be available where the team has essentially guaranteed with its expected fee that certain building performance will be attained. Professional liability insurance covers a design firm only for its professional negligence and specifically excludes from coverage damages that arise solely from guarantees and warranties. If the design firm was not negligent in failing to meet the performance standard, it could still be held legally liable for breaching the contractual promise, and damages associated with that breach would not be covered.

Sophisticated building owners understand that when the construction contractor is required to absorb a risk it cannot control, the construction price goes up, because the contractor will have no choice but to add a contingency to cover its potential loss. A design team that has agreed to meet a performance guarantee may be wise to take a similar approach by over-designing the building systems to increase the likelihood that the operating building will meet the required performance. Such “over design” will benefit the owner, but will come at a price that not every owner would be willing to pay. The ENR article explains that according to the team’s energy modeling, the GSA building will use 40% less energy than ASHRAE 90.1’s benchmark, providing a 10% cushion over the 30% less energy usage required by the contract. The GSA’s Seattle building is chock-full of energy saving systems, some of which were included in a $1.3 million dollar change order.

The GSA chose not to execute an agreement with an Award Fee for the achievement of goals, as some other federal agencies have done (recall, for example, the Pentagon Renovation). Instead, it imposed a penalty: meet the goal or forfeit your money. According to the article, the GSA calls this an “integrated process” requiring “tremendous collaboration.” The GSA’s penalty-based process should not be confused with the collaborative and integrated process others have in mind when they enter into multi-party Integrated Project Delivery (IPD) agreements. IPD contracts may not be painless, because the design and construction team puts its profit at risk to cover the costs of its mistakes, but the IPD contracts performed to date have incentivized outstanding performance by offering increased profits, not by denying compensation, for the achievement of project goals.

Design teams are making significant progress in showing that good design can affect outcomes for building users. Evidence-based design, where design decisions are based on quantifiable research, is making great strides in healthcare, and it has applications in retail and other industries. Certainly, building owners benefit from designs that are based on delivering predictable outcomes, whether derived from prior research or from computer-generated energy models. Such design is here to stay and will only help the industry, but owners, designers, and contractors alike should consider carefully whether a contractual performance guarantee is the optimal way to achieve the desired result, given the potential uninsurable risks, and increased costs to the project.

About the author: Suzanne Harness is president of Harness Project Solutions, LLC and a consultant to Construction Risk, LLC, providing risk management services for design professionals, contractors and project owners. The services include reviewing contracts, presenting risk management workshops and seminars, providing webinars and distance continuing education programs, as well as assisting professional liability insureds with risk management issues on a variety of matters. A licensed architect and construction lawyer, Suzanne has worked in the design and construction industry for over thirty years, serving both the public and the private sectors. This article is published in ConstructionRisk.com Report, Vol. 14, No. 6 (June 2012).

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ConstructionRisk.com Report (June 2012)