‘Less Restrictive’ No-Damages-for-Delay Clause Still Vulnerable

By John S. Mrowiec

Over the years, we occasionally have addressed “no damages for delay” clauses.

Some courts have recognized exceptions to the harsh effect of these clauses. Claimants have been able to plead the exceptions sufficiently to avoid their cases being dismissed at inception.

Two of the more popular exceptions nationally to enforcement of “no damages for delay” clauses are “active interference” by the party seeking to enforce the clause and delays arising from defective design.

Some parties now include recognized exceptions in the language of the clause hoping to eliminate application of the cited exceptions. Others exclude particular causes of delays from the clause in hopes that the nonexcluded causes thereby will remain subject to the clause.

A clause of the latter type was discussed in United State f/u/b Gurtz Electric Co. v. Gilbane Building Co., 2008 U.S. Dist. LEXIS 81217 (N.D. Ill., Oct. 10, 2008).

Sub Gets No Extension

The Gurtz Electric Co. case arose under an electrical subcontract between a construction manager, Gilbane Building Co., and a subcontractor, Gurtz Electric Co. The project concerned a prime contract with the United States Government Services Agency.

The original subcontract price was $6,122,000 and was to be substantially complete by Oct. 28, 2005. By signed Change Orders, the subcontract price increased to $7,825,262. While the owner apparently adjusted the construction manager’s substantial completion date to Jan. 3, 2006, the subcontractor received no time extensions.

The subcontractor filed a lawsuit against the construction manager and construction manager’s payment bond surety to recover more than $2 million in alleged additional labor and supervision costs and premium time expenses.

The subcontractor claimed that the construction manager delayed subcontractor by furnishing defective plans and specifications, demanded that the subcontractor perform work different from, or in addition to, the work required under the subcontract, interfered with the subcontractor’s reasonable access to the project, otherwise delayed and disrupted the subcontractor’s ability to work, failed to cooperate, failed to properly schedule or coordinate construction manager’s other subcontractors and suppliers in a manner which would permit subcontractor to perform its work in a timely and efficient manner and failed to grant warranted time extensions. Because of the alleged breaches, the subcontractor contended it was denied the ability to perform work in an organized and efficient manner and was instead forced to work in areas congested with other subcontractors.

The construction manager moved to dismiss subcontractor’s complaint. The construction manager relied on an “exculpatory” clause in the subcontract. The clause provided: “Neither the Owner nor the Architect nor the Construction Manager shall have liability to the Trade Contractor . . . for delay, hindrance, or interference in the performance of the Work, however caused, except for delay or hindrance resulting from active interference of Owner or its representatives in such Trade Contractor’s execution of the Work, and except for delay or hindrance resulting from defective plans and specifications.”

The subcontract was governed by Illinois law. The subcontractor argued that Illinois law recognized exceptions to “no damages for delay” clauses and that subcontractor’s complaint properly pled those exceptions. The construction manager argued that those exceptions apply only to “no damages for delay” clauses that totally preclude recovery and not to the clause at issue in the case which did not “completely preclude [subcontractor] from obtaining delay damages,” Gurtz Electric Co., 2008 U.S. Dist. LEXIS 81217, *9. The construction manager contended that the stated exceptions in the clause for active interference and design defects made the clause more fair than those in other cases.

Relevant 1990s Case

Gurtz Electric Co. rejected the argument on the basis that another case already had permitted a claimant to avoid a clause which limited, but did not completely prohibit, recovery of delay damages, Gurtz Electric Co., 2008 U.S. Dist. LEXIS 81217, *9 quoting Mellon Stuart Construction Co. v. Metropolitan Water Reclamation District, 1995 U.S. Dist. LEXIS 5376 at *35 (N.D. Ill. April 19, 1995).

Gurtz Electric found that the exculpatory clause was “fairly restrictive” and even more restrictive than that in Mellon Stuart. Here, the clause prevents the subcontractor from recovering out-of-pocket expenses, in addition to lost profits and overhead costs, which do not result from “active interference” or “defective plans and specifications.”

If the clause were enforced, subcontractor would be prevented from recovering for delays caused by construction manager’s mismanagement of the subcontractors working on the project and construction manager’s failure to cooperate with the subcontractor, actions which may not fall within the clause but nonetheless allegedly prevented subcontractor from substantially completing its work by the deadline, Gurtz Electric Co., 2008 U.S. Dist. LEXIS 81217, *12.

The construction manager argued that the clause was not as restrictive as it might appear because another clause permitted subcontractor to time extensions for delays outside of subcontractor’s control.

The court disagreed, noting that the construction manager acknowledged that the purpose of a time extension was not to compensate the subcontractor for damages but to prevent construction manager from imposing liquidated damages on subcontractor for delay not within the subcontractor’s control. The subcontractor could not give itself these time extensions but had to rely on construction manager to do so which subcontractor alleged construction manager failed to do, Gurtz Electric Co., 2008 U.S. Dist. LEXIS 81217, *12 – 13.

Nor did the Gurtz Electric court accept the construction manager’s argument that the clause should be enforced without further exceptions because another provision of the subcontract permitted subcontractor to recover directly from other subcontractors for delays subcontractors caused. The court reasoned that the subcontractor was alleging that construction manager caused the delays by failing properly to manage and control the other subcontractors and suppliers, not that the other subcontractors caused the claimant subcontractor’s delays, Gurtz Electric Co., 2008 U.S. Dist. LEXIS 81217, *13 – 14.

Therefore, the Gurtz Electric court found that the Illinois recognized exceptions to “no damages for delay” clauses could apply to the damages limitation clause. Accordingly, the construction manager’s motion to dismiss was denied. Of course, whether subcontractor could present facts sufficient to show the exceptions actually apply would depend on subcontractor’s proof.