Every state has its own statutes — as well as judicial decisions, or case law — to regulate the construction taking place within its borders. States can, and do, take widely divergent views on how best to deal with a variety of complex construction issues.
For contractors, subcontractors, owners, or lenders intending to do business in Washington, Louisiana, Colorado, Oregon, or elsewhere, it is wise to know the nuances of construction law encountered in that particular state before agreeing to undertake a project. And this is particularly true when dealing with the issue of construction delays.
Transferring Risk through a “No Damages for Delay” Clause
Delays during construction will happen. Savvy professionals recognize this, and plan accordingly. Rain days are estimated, and handoff times are included in the projected schedules. Some cushion is made for unexpected time lags, as well.
Nevertheless, unexpected events do occur — e.g., floods hit the project, or a labor union calls a strike — as well as unethical or negligent actions by one of the parties involved, which cause significant delays that run up costs. Everyone wants to minimize the risk that their bottom line will have to bear the financial responsibility for any of the resulting time delays.
Owners argue that they need “no damages for delay” clauses in their contracts, because the clauses offer protection from general contractors filing unjustified or extravagantly high delay claims. Owners point to requests they’ve received from contractors that are so filled with spurious, overblown reimbursement requests that they’ve labeled them “kitchen sink claims.”
General contractors argue they need “no damages for delay” clauses in their contracts with subcontractors for the same reason — they can’t take the hit for all the subcontractors’ delay costs as they’ve been presented, especially if the owner has required a “no damages for delay” claim in his contract with the contractor. General contractors point to owners who issue defective plans and specifications, or who take unreasonably long amounts of time in responding to requests for clarification, delaying the project for months, costing the contractor significant damage which skyrockets as subcontractor delay claims are tallied.
Subcontractors complain that they have no choice. They maintain that they are forced to sign contracts containing what may well be a dangerous provision for their business, because they are afraid of losing the job as well as offending their customer. For many subcontractors, the risk of a “no damage for delay” clause is just a part of doing business.
What is A No Damages for Delay Clause?
Simply put, a “no damages for delay” clause is placed into a written contract between an owner and a general contractor (or a general contractor and a subcontractor), stating that the contractor cannot recover monetary damages from the owner for any financial losses the contractor suffers due to construction delays caused by a variety of things, including actions by the owner or the owner’s representatives, e.g., the architects. By agreeing to the contract and its “no damages for delay” clause, the general contractor assumes the full financial risk for any and all delays in construction.
What are Delay Damages?
Delay damages are those financial costs that occur which are over and above the direct costs which must be expended to remedy the cause of the delay — i.e., change orders, defective plans or specifications, or a differing site condition. They are shown through the documentation of the project’s “critical path.”
Critical Path itself is an established method for scheduling the construction of a project, from start to finish. Understandably complicated, the “critical path” involves compiling a list, in sequence, of the construction activities that will take the longest amount of time to complete.
The duration of the Critical Path is found by totaling the various activities’ time needs. The Critical Path becomes the longest possible “path” through a network of activities, and gives project participants the minimum amount of time that will be needed to finish the job. If a delay impacts the project’s Critical Path, then it causes the project to be finished later than the established deadline.
What’s not Delay Damage?
Some events don’t cause delay. Not all delays impact the Critical Path; for example, a tardy delivery of shrubs when the sprinkler system has yet to be installed will not impact the critical path and is therefore, not delay damage. Similarly, an owner’s change of carpet color when construction still involves pouring the foundation isn’t a delay damage.
Some events that cause delay aren’t considered in delay damage calculations, either. Most contracts give special treatment to delays that are caused by Acts of God or bad weather. In the event one of these occurs, the contractor is usually given an extension of time to complete the project. By extending the deadline, these events technically don’t cause a delay in construction.
Why are “No Delay Damage” Clauses Controversial?
Without a “no damages for delay” clause, all project participants would share the same incentive to get the project completed on time. Critics of the clause argue that it prevents wronged parties from suing for breach of contract when a project participant has caused the delay – and thus, their harm. Contractors point to capricious or fraudulent owners who are allowed to escape responsibility for their own bad acts.
Various states have responded to “no damages for delay” clauses in different ways. For example:
Washington’s legislature has passed a law stating that a clause in a construction contract purporting to waive a contractor’s claim for delay damages caused by the owner is “void and unenforceable.” This is true for both public and private contracts, making Washington the frontrunner of all 50 states in barring “no damages for delay” clauses in construction contracts.
California, Colorado, Massachusetts, Oregon
Each of these states has passed laws invalidating “no damages for delay” clauses in public contracts. Private contracts have been left to judicial decision, with courts deciding whether not to analogize to the passed legislation in dealing with “no damages for delay” clauses in contracts between private parties.
Louisiana has not passed legislation that specifically deals with “no damages for delay” clauses in construction contracts, although its Public Works Act does prohibit these clauses in contracts governed by the Act.
Moreover, Louisiana courts continue to uphold these clauses, unless the delay occurred because of something that no party had anticipated, or the delay was caused by a party’s actual bad faith or active interference.
Finally, Louisiana Civil Code article 2769 provides that if a contractor or subcontractor fails to do the work he has contracted to do, or if he does not execute it in the manner or within the time he has agreed to do it, he will be liable in damages for the losses that result.
Should you use a “No Damages for Delay” clause in your contract?
Obviously, the first step in answering this question would be to determine what state law applies to your agreement. As shown above, Washington and Louisiana view “no damages for delay” clauses differently at this point in time.
However, even if state law will respect the contractual clause, perhaps
the more practical determination is how best to prevent its ever being needed. Enforcement of a “no damages for delay” clause can be protracted and extended litigation, and become an exorbitantly high expense in both time and money.
Finding other practical and legal avenues to deal with delay may be the better option.