No-Damages-For-Delay Clauses are Enforceable
In an effort to protect against claims for delay, “no-damage-for-delay” clauses are more commonly being placed in contracts. One example is Section 8.3.1 of the Arizona School Facility Boards General Conditions, which in pertinent part provides:
Except as specifically provided in paragraph GC-3.4 (Owner’s right to stop work) or paragraph GC-12.1 (changes in the work), Contractor shall not be entitled to payment or compensation of any kind from the Owner for direct, indirect or impact damages (including but not limited to the cost of acceleration) arising because of reasonable hindrance or delay from any cause whatsoever, whether such hindrance or delay was foreseeable or unforeseeable or avoidable or unavoidable. However, this provision shall not preclude recovery by Contractor for damages caused by unreasonable delays or hindrances due to the acts or omissions of the district or persons acting for the district. Except as provided in this subparagraph, the Contractor’s sole remedy for delays shall be an extension of time. What does this mean? Is it contradictory? Does it mean anything?
Section GC-3.4, the owner’s right to stop work, provides that the owner or project manager may order the contractor to suspend, delay or interrupt all or part of the work for such period of time as it may determine to be appropriate for the convenience of the owner. Section GC-12.1, “Changes in the Work,” allows the owner or project manager to make change in the work. Under 12.1.4, if a change increases or decreases the contractor’s time required for performance, an equitable adjustment shall be made.
If a delay is reasonable, are there any damages for delay? Is the only relief available an extension of time?
An additional issue in a public contract with a “no-damages-for-delay clause” is A.R.S. §34-221(E) that provides:
A Contract for the procurement of construction shall include a provision which provides for negotiations between the agent and the contractor for the recovery of damages related to expenses incurred by the Contractor or a delay for which the agent is responsible, which is unreasonable under the circumstances and which was not within the contemplation of the parties to the contract. This Section shall not be construed to avoid any provision of the Contract which requires notice of delays, provides for arbitration or other procedures for settlement or provides for liquidated damages.
This clause appears to be incorporated into the second part of Section 8.3.1. If delay is unreasonable and caused by an owner, a contractor can negotiate to recover damages, not be paid, just negotiate. Does the right to negotiate imply a right to be paid?
Compare section 8.3.1 with the statue and the question then becomes, was the owner responsible and was it “unreasonable under the circumstances” and “not within the contemplation of the parties to the contract”? Section 8.3.1 provides that there is no payment because of “reasonable hindrance or delay from any cause whatsoever, whether such hindrance or delay was foreseeable or unforeseeable or avoidable or unavoidable.” Further, this section “shall not preclude recovery” for damages caused by unreasonable delays or hindrances due to acts or omissions of the district. Does this imply that reasonable delays, even if they are caused by the district, will have no payment?
Take the following example. School project is delayed because the contractor claims the plans have a conflict or omission requiring additional work by change order. The owner and its architect refuse to approve a change order or a construction change directive for the design change, but the work cannot proceed without some action. The owner and engineer refuse to issue a directive for the contractor to perform the work regardless of the cause. A construction change directive resolves for the moment whether the contractor is right or wrong, whether the plans included the required design or not. It allows the project to proceed without delay.
Failure by the owner to approve a change order or construction change directive delays the project for almost six months. A change order is ultimately approved six months later, for $1,200. The delay cost the contractor over $60,000. Is the contractor entitled to be paid for the delay while the project failed to proceed with a dispute over $1,200? The answer under the School Facility Board contract would require determining if the owner was reasonable, a more difficult standard than was there an omission in the plans.
No damage-for-delay clauses are enforceable. Litigation tries to find an exception to the clauses or to mitigate their enforceability by identifying causes not covered by the clause. The problem presented by the School Facility Board’s clause is typical of many contracts. In an effort to cover all potential problems and minimize unexpected costs, lawyers create contract language that is filled with conflicts or is oppressive. Care should be taken to review contract documents so you understand what risks you are accepting. If contract language is oppressive, and as a result bidders refuse to bid projects, the market will force a change. However, if there is no objection, each party will continue to shift as much risk as it can to the next party in line.