What are the three most important risk-shifting provisions contractors and subcontractors should be concerned about?

by Robinson+Cole Construction Law Zone
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“No damages for delay” clauses:

“No damages for delay” clauses allocate the risks of project delays and disruptions between the owner and contractor. Oftentimes, these clauses preclude a contractor from recovering increased costs resulting from extended project duration, including claims for increased overhead and supervision costs, loss of productivity, and acceleration, even when such costs result from owner caused delays or design issues. Although there are judicially recognized exceptions to the enforcement of these clauses, they are routinely enforced by courts to defeat otherwise meritorious claims. Connecticut, like New York, recognizes four exceptions to the enforceability of no damage for delay clauses:

‘(1) delays caused by the [owner’s] bad faith or its [willful], malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the [owner], and (4) delays resulting from the [owner’s] breach of a fundamental obligation of the contract.’

Nevertheless, these exceptions are narrow and contractors and subcontractors face an uphill battle in seeking to obtain their shelter from the courts. Contractors and subcontractors are often surprised to learn, only after a project has gone awry, that courts will enforce these clauses strictly.

For example, in Elec. Contrs., Inc. v. Pike Co., 2015 U.S. Dist. LEXIS 70092 (D. Conn. May 29, 2015), the United States Court for the District of Connecticut recently enforced a no damages for delay clause in a subcontract which provided that:

3.4 Delays Should the Subcontractor be delayed by the act or omission of the Contractor or by any other contractor or subcontractor on the Project, or by any cause beyond the Subcontractor’s control and not due to any fault, act or omission on its part, then the time for completion of the work shall be extended for a period equivalent to the time lost by reason of any of the aforesaid causes, as determined by the Contractor, and Subcontractor agrees to make no claim for damages for delay in the performance of this Subcontract occasioned by any act or omission to act of the Contractor or any of its representatives.

Id. at *7 (emphasis added).

Because the subcontractor’s time for performance of the work had been extended, the court found that the subcontractor’s claims for “ ‘delay,’ ‘compression,’ ‘acceleration,’ and/or ‘stacking of trades,’ ” were all barred by the contractual no damages for delay language. Id. at *58, see also Mafco Elec. Contrs., Inc. v. Turner Constr. Co., 2009 U.S. Dist. LEXIS 24499 (D. Conn. Mar. 26, 2009)(enforcing a no damages for delay clause to defeat a electrical subcontractor’s claims for “abandonment of the Subcontract schedule,” “requiring . . . out of sequence [work],” failure “to provide reasonable access,” failure “to timely complete antecedent work,” failure “to properly coordinate the work schedules,” compression and acceleration of the work, “failure to process and issue necessary information in a timely fashion,” and “continually requiring Mafco to perform extra work.”)

Accordingly, construction agreements should be reviewed closely in order to assess whether increased costs stemming from project delays are recoverable and to determine the allocation of risks associated with potential delays.

Mutual Waivers of Consequential Damages and Capping Liquidated Damages:

Another key provision for contractors to keep an eye out for is what is known as a “mutual waiver of consequential damages.” Depending on the project at hand, such a provision can actually provide contractors with significant protection. Although mutual waivers of consequential damages can limit damages a contractor may recover from an owner for such things as lost profits, perhaps more importantly, they can protect the contractor and its surety from potentially crippling liability for the owner’s lost revenue and other speculative losses due to delayed project completion. Such costs can be very significant, particularly if delayed completion causes the owner to incur lost operating revenue it would have received if the project had been completed in accordance with the original schedule. Similarly, negotiating a cap on liquidated damages up front protects the contractor and its surety against potentially open-ended liability.

Indemnity Provisions

Although many states have “anti-indemnity” statutes that invalidate clauses requiring contractors to indemnify owners for damages caused by the owner’s own negligence, contractors are still often required to provide broad indemnification to owners from damages “arising from” the contractor’s work. Furthermore, the scope of protection afforded by anti-indemnity statues varies from state to state. In certain jurisdictions, the prohibition applies only to clauses requiring contractors to indemnify owners from damages caused by the owner’s sole or exclusive negligence, and does not bar provisions requiring indemnity when the owner is partially at fault. Other jurisdictions provide greater protection, barring clauses that purport to require a contractor to indemnify an owner from all damages, even those partially caused by the owner’s negligence. Contractors must ensure that their insurance covers the scope of their indemnity obligations, and should consult with their insurance professionals to ensure that sufficient coverage is in place.

 

1 White Oak Corp. v. Dept. of Transportation, 217 Conn. 281, 289, 585 A.2d 1199 (1991) quoting Corrino Civetta Construction Corp. v. New York, 67 N.Y.2d 297, 309, 493 N.E.2d 905, 502 N.Y.S.2d 681 (1986)

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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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