March  8, 2002



Bulletin #54, The Endless Project (March 8, 2002)

ZZZ Sheet Metal had been requested to bid on an HVAC system for a resort complex being constructed in a nearby state. The project was very large, and the schedule called for a two-year construction period. On the other hand, the plans and specifications did not appear to be particularly complex. Activity in the local construction market had fallen off, and ZZZ needed the work. A bid was prepared, and submitted. After some back and forth with the general contractor, the subcontractor’s pricing was accepted. The general contractor delivered three originals of a subcontract form, and requested that ZZZ sign, and 'overnight' mail the contracts back immediately.

The grizzled veteran in the ZZZ office, who typically reviewed contracts, was on vacation, and the task was handed to one of the junior people, who also worked on estimating. The staff member was told that he had to complete the review immediately so that the subcontractor could sign, and return the contracts. He rushed through the form, and assessed the contract as follows: “It looks pretty much like the normal contracts we get.” The president of ZZZ signed immediately, and the contract was returned to the general contractor.

What had seemed to be a relatively simple (and lucrative) project proved to be not so simple. By the beginning of Phase II of the three-phase project, it was six months behind schedule. By the commencement of Phase III, it was almost a year behind. During Phase I, the developer and the construction manager fought repeatedly, and the construction manager was ultimately terminated. The second construction manager clashed with the general contractor, and terminated the general contractor for alleged default halfway through Phase II. The developer (acting on the advice of the new construction manager) decided not to replace the general contractor, and continued the work through the construction manager and the various subcontractors. In the various transitions, payment applications were misplaced, payments were delayed, and overall project records became a shambles. While the subcontractors tried their best to coordinate among themselves, there were many time periods when it appeared that no one was in charge. Change orders and shop drawings prepared, and submitted by the subcontractors disappeared, never to be heard from again. On numerous occasions, the subcontractors discussed filing liens and walking off the project, until the developer got its act together.

Since ZZZ was the HVAC subcontractor, its work was heavily impacted by the delays. Until the building structures were in place, the subcontractor could do nothing more than fight off its vendors (who were demanding payment for equipment that had long since been shipped). By the middle of Phase II, the subcontractor had reached the limits of its patience, and submitted a formal notice under the subcontract concerning delays. The response of the new construction manager was extremely hostile, and he threatened to terminate the subcontractor for alleged failure to properly coordinate its work, as well as for trumped-up work quality and safety issues. At the time, ZZZ had applications for payment pending for three month’s work, and the subcontractor felt that it had to continue working in order to maintain any prospect of payment. ZZZ periodically submitted follow-up notices as to the delays, and received the same hostile response. When its applications for payment were finally processed, they came back with large set-off amounts and backcharges. The subcontractor then knew for certain that the project would end up in a legal “slug fest,” and assumed that the delay damages' issue would have to be dealt with along with the other claims.

At the conclusion of the project, ZZZ was not only owed its retainage, and large sums that had been withheld from the contract (as well as from approved change orders), but had also incurred a very large sum in provable delay damages. The subcontract form did not contain a dispute resolution provision, and ZZZ’s attorney recommended that the subcontractor file a lawsuit in the jurisdiction where the project was located. ZZZ also filed a mechanic's lien in the amount of its entire claim.

The developer and the construction manager responded by counterclaiming for a large sum in alleged damages. They also pointed to the following language contained in the subcontract form in responding to the delay damages' claim:

“Contractor expressly agrees for itself, its subcontractors and suppliers, not to make, and hereby waives, any claim for damages on account of obstruction or hindrance. Contractor’s sole remedy for any delay, obstruction or hindrance shall be an extension of the time in which to complete the work.”

The construction manager also argued that ZZZ had blatantly failed to comply with the notice of claim provisions in the subcontract to a large portion of its work, since it provided no notice as to the alleged delays until late in Phase II. The developer and construction manager also attempted to fend off change-related charges that were not the subject of written change order approvals.

The developer and construction manager were concerned about some of the set-off and backcharge items, but considered the delay claim defense a “slam dunk,” and refused to negotiate on that item. They argued to the court that the language of the subcontract agreement could not be more clear, and had been voluntarily accepted by the subcontractor before ZZZ started its work. The subcontractor had not attempted to negotiate the language or raised any objection to it. While ZZZ was clearly making headway on the change order work and the backcharges, the delay claims were the largest element of its damages, and appeared to be a lost cause. After the trial, and before the court ruled, the developer offered 20 cents on the dollar for a total release, and the president of ZZZ was sorely tempted to accept the offer. He probably would have done so had the bank not called that morning demanding immediate payment of an amount considerably larger than the settlement offer.

When the court did rule, its decision shocked everyone. It held that the language of the subcontract could not override the legitimacy of delay claims in favor of the subcontractor, where the delays were caused by the developer’s willful or grossly negligent conduct or were so excessive as not to be reasonably within the contemplation of any of the parties at the commencement of the contract. The court indicated that the delays on the project were so extensive and continuous that they constituted, in essence, a breach of the subcontract terms by the developer and construction manager, justifying claims for delay damages in favor of the subcontractor. On the other hand, the court indicated that ZZZ could not recover for any delay damages incurred prior to its delivery of delay notice during Phase II. The judge referred to language in the subcontract clearly requiring the delivery of notice of delay, even if the subcontractor merely intended to make a demand for additional time. The court stated that it would also apply this notice requirement to damages for delay, and thereby denied a significant large portion of ZZZ’s delay claim. All parties left the courtroom somewhat surprised and agitated. While the outcome of the case had not been the total disaster that appeared to be facing ZZZ, the subcontractor had watched its profit margin disappear as it absorbed the impact of a large portion of the project delay costs.

Entire books have been written about delay claims, and they will inevitably continue to be a source of contention among owners, contractors and subcontractors. However, there are some things that a subcontractor can do to protect itself against absorbing the entire impact of delay claims. These include:

  • Clearly understand what the subcontract permits in terms of recovery for delay. If there is a “no damages for delay” clause, propose language providing for “reasonable compensation.”
  • Focus on notice requirements, and timelines applicable to delay claims. Decision-makers (whether judges or arbitrators) will often seize upon a missed technical deadline as a simple and clear way to dispose of a complex dispute.
  • If you signed a subcontract with “no damages for delay” language in it (despite your best efforts to change it), do not automatically assume that you have no valid claim for delay damages. In a number of jurisdictions, courts have found that “no damages for delay” provisions are, as a general matter, unenforceable and against public policy. In other jurisdictions, there is not an absolute prohibition, but there is a stated or unstated presumption against enforceability, and the court may try to find circumstances that will allow the award of delay damages.
  • Carefully maintain documentation that will allow you to prove your delay damage claims when the time comes. The more extensive, and clearer the documentation (particularly in communicating with the higher tiers), the better your chance of recovery.

 

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