Subcontractor Loses Delay Claim for Delays Occurring Before Execution of Subcontract

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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Both an Illinois circuit and appellate court had little sympathy for a subcontractor that suffered significant delays before executing a subcontract, which failed to allow for compensation for the prior delays. Asset Recovery Contracting LLC v. Walsh Construction Co. of Illinois, 2012 IL App (1st) 101226 (November 1, 2012).

Walsh Construction Company entered a general contract with the owner of a building to perform the core and shell work for the conversion of an existing commercial building into luxury condominiums. Walsh selected Asset Recovery Contracting (ARC) as its demolition subcontractor. ARC began work on the project in July 2003 without a written, signed subcontract with Walsh. In August 2003, the project experienced various delays caused by work restrictions imposed by a tenant in the building and by the Chicago Fire Department. On March 3, 2004, ARC reportedly submitted change requests to Walsh in the sum of $590,000 for the delays.

On March 19, 2004, approximately nine months after starting work, ARC signed the subcontract that ARC’s attorneys had negotiated with Walsh. Walsh signed the subcontract in May 2004. The signed subcontract did not contain any provision for the additional costs that ARC was aware of at the time ARC executed the subcontract. Moreover, the subcontract allowed for an extension of time for delays but waived all other damages except (1) when Walsh is able to recover delay damages from the owner under its contract with the owner (the prime contract); or (2) when the delays were caused “by acts constituting intentional interference by the Owner.” Remarkably, the prime contract contained a no-damages-for-delay provision, prohibiting Walsh from recovering monetary damages from the owner. Therefore, ARC could only recover if it could prove “intentional interference” or it could satisfy judicial exceptions to no-damages-for-delay clauses.

When Walsh refused to compensate ARC for its delays, ARC filed suit against Walsh, seeking compensation for the delays that occurred before the parties executed the subcontract. The trial court denied ARC’s delay claims. The court found it significant that ARC was negotiating a contract and had the ability to change the terms to reflect the current conditions but failed to do so. The court further rejected ARC’s attempts to establish an exception to the enforceability of the no-damages-for-delay clause because the owner allegedly caused the delays.

On appeal, ARC fared no better than it did in the trial court. The First District Appellate Court affirmed the denial of ARC’s delay damages. In affirming the denial, the appellate court reversed the trial court on its finding that the effective date of the subcontract was the date that ARC signed the subcontract (March 2004) and not the effective date expressly provided for in the subcontract (September 12, 2003). The appellate court noted that “the date on the contract is ordinarily the effective date, and where the contract is executed later, its contractual terms relate back and are effective from the date of the contract if such coverage is clear from the face of the contract, as it is here.”

The appellate court rejected ARC’s argument that the trial court should have never considered parol evidence—that the project schedules were revised and that the parties intended to be bound by the revised schedules. Because numerous provisions that provided for changes and amendments to the work schedule opened the door for ambiguity, the appellate court rejected ARC’s argument that the trial court should have never reviewed the revised schedules.

The appellate court further agreed with the trial court that the subcontract provisions waived delay damages except for those caused by the owner’s intentional interference (as expressly excepted in the subcontract). The appellate court found no evidence that the owner interfered with its work or that the conduct of the owner’s agent could be imputed to the owner.

The appellate court reiterated the settled exceptions to no-damages-for-delay clauses in Illinois: (1) delay caused by bad faith; (2) delay not within contemplation of the parties; (3) delay of unreasonable duration; and (4) delay attributable to inexcusable ignorance or incompetence of the engineer. But the appellate court refused to expand the exceptions to the enforceability of no-damages-for-delay clauses to include the owner’s intentional interference. Similarly, the court found that ARC failed to satisfy any of the other exceptions to the no-damages-for-delay clause. The appellate court rejected ARC’s contention that the delay was not within contemplation of the parties at the time of execution of the subcontract. At that time, ARC had knowledge of the delays preceding execution of the subcontract. The court also found that the delays were not unreasonable, because ARC was accepting changes in the schedule without making concomitant claims for damages.

This decision underscores several lessons:

  • If a subcontractor hinges its recovery on a general contractor’s recovery of damages from the owner, the subcontractor must make certain that the general contractor’s recovery of damages against an owner has not been waived or is otherwise not possible.
  • The date a contract was signed will not alter a contrary effective date articulated in a contract.
  • When a contract is signed it should reflect the most current schedule and price. If the contract reflects past or outdated conditions, a party risks losing rights and claims.
  • Courts will enforce no-damages-for-delay provisions.
  • Courts will likely find delays that took place prior to execution of a contract to be reasonably within the contemplation of the parties, defeating any attempt to invalidate a no-damages-for-delay clause.
  • A subcontractor that accepts schedule changes without making monetary claims for delays will likely be deemed to have waived its delay claims.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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