Recoverability of Delay Damages

Jay M. Mann

A. COMMON LAW THEORIES FOR RECOVERY

A delay claim is basically a claim for breach of contract. From the owner’s point of view, the project was supposed to be finished in a certain number of days if completion is delayed due to the fault of the contractor, the contractor has breached the contract. From the contractor’s point of view, it estimated a certain number of days on the project and, in fact, the contract specified the number of days for performance – if the project takes more than the specified number of days due to actions of the owner or its architect, the owner has breached the contract.

We note parenthetically and at the outset that, except in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project . . . Even the most painstaking planning frequently turns out to be mere conjecture and accommodation to changes must necessarily be of the rough, quick and ad hoc sort, analogous to ever-changing commands on the battlefield.

Blake Construction Co. v. C.T. Coakley Co., Inc., 431 A.2d 569 (D.C. 1981).

There are three characteristics of delay: first, the “nature” of the delay; second, the “extent” of the delay; and third, the “cost” of the delay. For example, if an owner requests numerous changes in the plans and specifications, the project may be completed on time or the project may be delayed, depending upon the number and the substance of these changes. Waiting on the architect’s approval for these changes goes to the “nature” of the delay. How long the contractor must wait before the changes are approved goes to the “extent” of the delay. The damages incurred while waiting for the changes goes to the “cost.”

In the above example, waiting a reasonable time for the architect’s approval on changed shop drawings is generally within the contemplation of the parties at the time of the contracting and, indeed, is often specified in the contract. If the time for architect approval is longer than that contemplated by the parties at the time of contracting, a court will most likely allow recovery for delay. See, e.g., Anthony P. Miller, Inc. v. U.S., 111 Ct.Cl. 252, 77 F.Supp. 209 (1948)(three month delay beyond that contemplated by the parties; recovery allowed).

Delay damages can be grouped broadly into two categories: “direct” damages and “indirect” damages. Direct damages are all those costs which can be traced directly to a delay, such as equipment rental costs, field office expenses, increased labor costs, and increased material costs. Indirect damages are the indirect costs arising from changes or delays in the schedule, such as lost profits, lost use of equipment at the site, impairment of capital, and increased interest payments on borrowed money because progress payments were delayed.

The most easily proved direct damage is field office expense. The contractor can determine the cost of a field office and, once the length of the delay caused by the owner is proved, the contractor can simply multiply his weekly or monthly expenses by the length of the delay.

Other types of damages in the category of direct damages are harder to prove. Suppose Subcontractor A was to have finished before Subcontractor B began his job, but subcontractor A is delayed for some reason. If Subcontractor B continues his work, Subcontractor A may have to expend twice the labor that was budgeted to work around Subcontractor B’s finished work. Such additional labor may result in additional costs termed “disruption damages” and may delay the subsequent subcontractor as well. For a representative case discussing both delay damages and disruption damages, see U.S. Industries, Inc. v. Blake Construction Co., 671 F.2d 539 (D.C.Cir. 1982).

A delay may cause increased material costs for materials purchased as scheduled but, because of the delay, needed to be stored. On the other hand, if the materials were not purchased, during the delay period, the cost may have increased. These expenses may be easily documented, but tracing these extra expenses directly back to a certain delay can be difficult.

Loss of productivity and labor inefficiencies can be caused by delay. Employing labor under adverse weather conditions, bringing untrained laborers onto the work-site who require extended training, keeping laborers over an eight-hour day, forcing one shift of workers to explain the status of the project to a new shift, or forcing different groups of workers onto the jobsite at one time may result in a claim for damages resulting from delay.

Increased interest on borrowed money is one of the most easily proved yet often disallowed indirect damage. See, e.g., Dravo Corp. v. U.S., 219 Ct.Cl. 416, 594 F.2d 842 (1979); Framlau Corp. v. U.S., 215 Ct.Cl. 185,568 F.2d 687 (1977). A contractor must often borrow substantial sums to purchase materials and pay his laborers. The contractor depends upon progress payments from the owner to make payments on these loans. Where a project is substantially delayed and progress payments not made, the interest costs on the borrowed money may be substantial.

The hardest indirect damage to prove is lost profits. Where a contractor has committed all his resources to one job, he cannot bid for new jobs. However, the difficulty of proving that he would have bid for, would have received, and, most important, would have made a profit on any prospective project often prevents recovery of this speculative damage claim. See, e.g., TechDyn Systems Corp. v. Whittaker Corp., 245 Va. 291,427 S.E.2d 334 (1993).

An indirect cost related to lost profits is impairment of capital. Where the contractor has substantial sums tied up in a project that is delayed, the contractor may exceed his bonding capacity, he may fail to bid on new jobs, and worst of all, may be forced into bankruptcy. The courts usually deny recovery for impairment of capital. See, e.g., Lewis v. Mobil Oil Corp., 438 F.2d 500 (8th Cir. 1971); Parmet Homes, Inc. v. Republic Insurance Co., 111 Mich.App. 140, 314 N.W.2d 453 (1981).

The remainder of this paper will address the parties responsible for delay, the legal theories on which to premise liability, contract clauses affecting recoverability of delay damages (such as “no damage for delay” and liquidated damages clauses), and, finally, whether delay damages can be recovered from either performance or payment bonds issued by a surety.

B. THE PARTIES RESPONSIBLE FOR DELAY

1. Owner Caused Delay

Implied contractual responsibilities of the owner to the contractor can include the following: to provide access to the jobsite; to cooperate with the contractor; and not to unreasonably interfere, hinder, or delay the work of the contractor. If the owner employs multiple contractors, it must coordinate the jobsite to ensure that all prior work that is allocated to a prior contractor is finished so that any subsequent contractor is not delayed and to ensure that one contractor’s work does not interfere with another contractor’s work. If the owner breaches any of these implied duties, and the breach delays the contractor, the owner can be held responsible to the contractor. Delays resulting from actions by the owner or its representatives are known as compensable delays. The other two .types of delay, non-excusable and excusable, will be discussed in subsequent sections.

If the contract specifies a starting date, the owner impliedly warrants that the site will be available for the contractor to start work. See, e.g., Blinderman Construction Co., Inc. v. U.S., 695 F.2d 552 (Fed. Cir. 1982); Moorehead Construction Co. v. City of Grand Forks, 508 F.2d 1008 (8th Cir. 1975); Higgins v. City of Fillmore, 639 P.2d 192 (Utah 1981). If the owner fails to provide access to the jobsite, the contractor most likely will be delayed. Any delay in the start date of the work should be documented by the contractor, especially where the contract specifies a start date and allows only a specified number of days to finish the project.

Access to the jobsite involves more than simply allowing the contractor onto the land. The failure to remove utility poles from a roadway right of way constituted failure to provide site access in Grant Construction Co. v. Burns, 92 Idaho 408, 443 P.2d 1005 (1968). Failure to provide site access can include a prior contractor, hired by the owner, who fails to complete work precedent to the start of a project. Moorehead Construction Co. v. City of Grand Forks, 508 F.2d 1008 (8th Cir. 1975); see also In re Roberts Construction Co., 172 Neb. 819, 111 N.W.2d 767 (1961). An owner who allows an earlier work force to delay the contractor’s access to the job site can be liable for delay. Head Construction Co., 77-1 B.C.A. (CCH) ¶ 12,226 (1977)(ENGBCA No. 3537). However, an Illinois court denied a general contractor’s claim for damages due to a delay in site availability because the court found that a specific start date was not implied in the contract and the contractor accepted the risk of prior contractors not finishing the work required before the general contractor could start. J.F. Edwards Construction Co. v. Illinois State Toll Highway Authority, 34 Ill.App.3d 929, 340 N.E.2d 572 (1975). For more complete discussion of “owner-caused” delays see, generally, 2 S. Stein, Construction Law, ¶ 6.11 (1988).

Constantly making changes in the contract drawings is one of the most common ways that an owner can interfere or hinder the general contractor. Although most contracts allow minor changes in the work, constant changes can escalate into major delay on the project. Federal government contracts have specific clauses allowing changes in drawings and specifications, provided those changes are within the scope of the contract. The contractor may get direct costs for these changes, but not consequential damages which include damage for delay. However, if such changes are “cardinal”, i.e., beyond the scope of the original contract, the contractor can recover consequential damages for delay. For a case illustrating what is and what is not a cardinal change, see McDaniel v. Ashton-Mardian Company, 357 F.2d 511 (9th Cir. 1966)(subcontractor could not recover consequential damages because changes were not cardinal).

An owner can also delay the contractor by failing to coordinate the work of various other contractors at the jobsite. ¶ 6.1.3 of the 1987 version of the General Conditions of the Contract for Construction, AIA Document A201, expressly provides that the owner “shall provide for coordination of the activities of the Owner’s own forces and of each separate contractor with the work of the Contractor, who shall cooperate with them.” Some courts have held an owner’s duties go beyond merely assuring that the different contractors are not frustrated. These courts have held that the owner has an affirmative duty to coordinate the work at the project site. See e.g., Gaspirini Excavating Co. v. Penn. Turnpike Comm’n, 409 Pa. 465, 187 A.2d 157 (1963). The owner may be able to shift this burden onto the contractors themselves, however, by including a clause in each of the contracts that places each prime contractor in privity with the others. See Edwin J. Dobson v. Rutgers State University, 157 N.J.5uper. 357, 384 A.2d 1121 (1978), aff'd sub nom. Broadway Maintenance Corp. v. Rutgers, 180 N.J.Super. 350, 434 A.2d 1125 (App. 1981), reaff’d, 90 N.J. 253,447 A.2d 906 (1982).

An owner can be liable for interference with a contractor’s ability to complete a project early. See, e.g., Sun Shipbuilding & Drydock Co. v. United States Lines, Inc., 439 F.Supp. 671 (E.D.Pa. 1977), aff'd without opinion, 582 F.2d 1276 (3rd Cir. 1978), cert. denied 439 U.S. 1073 (1979); Housing Authority v. E.W. Johnson Construction Co., 264 Ark. 523, 573 S.W.2d 316 (1978). In such a case, the contractor must be able to show that it would have completed the work prior to the scheduled completion date but for the delays attributable to the owner. Id. It should be noted that the federal courts were very skeptical about allowing a contractor to recover from the United States for delay to an early completion. See, e.g., United States v. Blair, 321 U.S. 730, 64 S.Ct. 820, 88 L.Ed. 1039 (1944). However, more recent cases recognize the right to recover, albeit with strict requirements as to proof. See, e.g., Weaver-Bailey Contractors, Inc. v. U.S., 19 Cl.Ct. 474 (1990); Metropolitan Paving Co. v. United States, 163 Ct.Cl. 420, 325 F.2d 241 (1963); In re ACS Construction Co.. Inc., ASBCA No. 35872 (October 18, 1988).

An owner can interfere with the contractor in other ways, including: stopping the work repeatedly to discuss the job with the workmen, Natkin & Co. v. George A. Fuller Co., 347 F.Supp. 17 (W.O. Mo. 1972); directing the contractor to perform work in a sequence materially different from that called out in the contract, Turnbull, Inc. v. U.S., 180 Ct.Cl. 1010 389 F.2d 1007 (1967); and insisting on stricter tolerances than that called for in the contract specifications, Kenneth Reed Construction Co. v. U.S., 201 Ct.Cl. 282, 475 F.2d 583 (1973). However, it is not interference for an owner to issue stop work notices to correct apparently non-conforming work, even though the work actually was conforming. Stammel Const. Co., 75-1 BCA (CCH) ¶ 11,078 (1974); Stallings & McCorvey, Inc., 83-2 BCA (CCH) ¶ 16,718 (1983).

An owner can interfere with the contractor by failing to disclose conditions at the jobsite which the owner knew would likely cause delays to the contractor. Warner Construction Co. v. City of Los Angeles, 2 Cal.3d 285, 466 P.2d 996, 85 Cal.Rptr. 444 (1970); Metropolitan Paving Co. v. U.S., 163 Ct.Cl. 420, 325 F.2d 241 (1963). Also, the failure to make timely progress payments can delay the contractor if it must pull off the job. An unwarranted refusal by the owner to make progress payments justifies abandonment of the project by the contractor. See General Conditions of the Contract for Construction, AIA Document A201, 1987 ed., ¶ 9.7.1.

The owner can be held liable for errors in the plans and specifications. If the owner supplies the specifications and the drawings, it impliedly warrants their suitability for the intended purpose and the contractor can recover delay damages resulting from errors in the plans or specifications. U.S. v. Spearin, 248 U.S. 132,39 S.Ct. 59, 63 L.Ed. 166 (1918); Laburnum Const. Corp. v. U.S., 163 Ct.Cl. 339, 325 F.2d 451 (1963). Also, the contractor can recover for time spent correcting defects in the plans and specifications that result in delays. Carl M. Halvorson, Inc. v. U.S., 198 Ct.Cl. 882, 461 F.2d 1337 (1972). The owner can cause delay by failing to approve changes in the shop drawings. Unless the contract specifically mentions a time for approval, the review and return by the owner should be within a “reasonable” time. Grow Construction Co. v. State, 56 A.D. 2d 95, 391 N.Y.S.2d 726 (1977); Continental Consolidated Corp., 67-2 BCA (CCH) ¶ 6624 (1967).

Finally, if the owner delays the project, or issues change orders affecting the completion date, but at the same time requires the contractor to meet the project schedule without extension, the owner can be held liable for acceleration damages. See, e.g., Norair Engineering Corp. v. U.S., 229 Ct.Cl. 160, 666 F.2d 546 (1981); Nat Harrison Assoc., Inc. v. Gulf States Utilities Co., 491 F.2d 578 (5th Cir. 1974); Siefford v. Housing Authority of City of Humboldt, 192 Neb. 643, 223 N.W.2d 816 (1974); Walter Kidde Constructors, Inc. v. State, 37 Conn.Supp. 50, 434 A.2d 962 (Conn.Super.Ct. 1981). To recover acceleration damages under federal law, the contractor must show that the delay forcing the acceleration was excusable. See, e.g., Envirotech Corp. v. Tennessee Valley Auth., 715 F.Supp. 190 (W.D.Ky. 1988)(contractor denied recovery for acceleration efforts geared toward award for early completion, not at direction of owner).

2. Delays Caused by Third Parties

If the owner employs multiple prime contractors, pinpointing the cause of delay may be as difficult as apportioning the cost. Some courts have allowed a contractor to sue other prime contractors under a third-party beneficiary theory. See, e.g.,., Hanbery Corp. v. State Bldg. Comm., 390 So.2d 277 (Miss. 1980); Barth Electric Co. v. Traylor Bros., Inc., 553 N.E.2d 504 (Ind.App 1990)(AIA General Conditions made co-prime contractors into third-party beneficiaries of separate prime contracts). However, where the jurisdiction follows strict third-part beneficiary principles, the court may not allow such cross-contractor suits. See, e.g., Norton v. First Federal Savings, 128 Ariz 176, 624 P.2d 854 (1981)(for a person to recover as a third-party beneficiary of a contract, an intention to benefit that person must be indicated in the contract itself, the contemplated benefit must be both intentional and direct, and it must definitely appear that the parties intended to recognize the third party as the primary party to be benefitted).

When dealing with the federal government, the contractor should be aware of the U.S. Supreme Court cases of U.S. v. Rice, 317 U.S. 61, 63 S.Ct. 120, 87 L.Ed. 53 (1942) and U.S. v. Blair, 321 U.S. 730,64 S.Ct. 820, 88 L.Ed. 1039 (1944) that place the cost of delays caused by other contractors onto the prime contractor. These cases were dependent on the standard “extension of time only” or “no damage for delay” clause in government contracts. This may result in the cost of delay being placed on the least responsible party --the delayed· prime contractor.

The better reasoned theory is to place liability for multiple-prime contractor delay on the owner under an implied covenant to coordinate the work or an implied duty to facilitate the work of the various primes. See, e.g., Shalman v. Board of Education, 31 A.D.2d 338, 297 N.Y.S.2d 1000 (l969)(owner has implied duty not to interfere and impliedly agrees that contractor will not be unreasonably delayed by failures of others to perform their work); J.A. Jones Construction Co. v. City of Dover, 372 A.2d 540 (Del.Super. 1977)(owner must make reasonable efforts to assure that other contractors perform their contracts); Shea-S&M Ball v. Mossman-Kiewit-Early, 606 F.2d 1245 (D.C.Cir. 1979)(implied duty to exercise authority to ensure cooperation among multiple prime contractors); United States Steel Corp. v. Missouri Pacific Railroad Co., 668 F.2d 435 (8th Cir. 1982), cert. denied 459 U.S. 836, 103 S.Ct. 80, 74 L.Ed.2d 77 (l982)(owner liable for delay to bridge superstructure contractor for substructure contractor’s failure to complete). Notwithstanding these cases, the contractor who wishes to recover for delay caused by another contractor must comply with any and all provisions regarding notice to the owner of delay. See, e.g., Cove Creek Development Corp. v. APAC-Alabama, Inc., 588 So.2d 458 (Ala. 1991)(where contractor failed to provide required twenty-day notice, delay caused by prior contractor did not prevent assessment of liquidated damages).

In the absence of exculpatory clauses, courts will find that the owner impliedly covenants not to hinder or delay the contract. See, e.g., George A. Fuller Co. v. U.S., 69 F.Supp. 409 (Ct.Cl. 1947). However, in the case of Edwin T. Dobson v. Rutgers State University, 157 N.J.Super. 357, 384 A.2d 1121 (1978), aff'd sub nom. Broadway Maintenance Corp. v. Rutgers, 180 N.J.Super. 350, 434 A.2d 1125 (App. 1981), reaff’d, 90 N.J. 253, 447 A.2d 906 (1982), the owner (a state university) negotiated contract clauses that placed each prime contractor on the job in privity with the others, thereby putting the responsibility of coordinating the work on the prime contractors themselves.

A few courts have allowed a cause of action directly against an architect for failure to coordinate efforts on a jobsite by multiple prime contractors. See, e.g., E.C. Ernst v. Manhattan Construction Company, 551 F.2d 1026 (5th Cir. 1977), reh’g denied in part, granted in part, 559 F.2d 268 (5th Cir.1977), cert. denied, Providence Hospital v. Manhattan Construction Co. of Texas, 434 U.S. 1067, 98 S.Ct. 1246, 55 L.Ed.2d 769 (1978).

Claims by contractors for delay damages caused by an architect or engineer normally should be brought against the owner as part of the contractor’s breach of contract claim, based on the legal position of these design professionals as agents of the owner. In early cases, the courts held that a contractor had no cause of action against an architect or an engineer because there was no privity of contract between the parties. See, e.g., Geare v. Sturgis, 14 F.2d 256 (D.C.Cir. 1926), overruled, Hannah v. Fletcher, 231 F.2d 469 (D.C.Cir. 1956); Gherardi v. Bd. of Education, 53 N.J.Super. 349, 147 A.2d 535 (1958). In other early cases, the courts held that the architect or engineer was immune from suit based on the design professional’s “quasi-judicial” function in the construction process. See, e.g., Craviolini v. Scholer & Fuller Associated Architects, 89 Ariz. 24, 357 P.2d 611 (1960); Wilder v. Crook, 250 Ala. 254, 34 So.2d 832 (1948). Courts are increasingly recognizing architects’ and engineers’ liability directly to the contractor, notwithstanding the lack of privity, albeit on a tort theory.

For example, California courts recognized early that privity is not required for third-parties to sue professionals for negligence. See, e.g., Gagne v. Bertram, 43 Ca1.2d 481, 275 P.2d 15 (1954)(soils engineer liable to third-party landowner for negligence). In Huber, Hunt & Nichols, Inc. v. Moore, 67 Cal.App.3d 278, 136 Cal.Rptr. 603 (1977), California extended this reasoning to architects:

The general rule in California is that a professional person may be held liable to third persons who suffer damage proximately caused by the negligence of the professional person as an independent contractor in the performance of his professional duties even though there is no privity of contract between the third person and the professional person and even though the client does not complain about the quality of the professional service. ... The reason for the rule is that the action is ex delicto, not ex contractu.

Id., 136 Cal. Rptr. at 617 (citations omitted). The court concluded that “[f]oreseeability and proximate cause now supplant the former requirement of privity of contract.” Id.; see also Donnelly Construction Co. v. O’Berg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (l984)(preparation of plans and specifications not quasi-judicial in nature; contractor allowed to proceed against the architect for negligence claims despite the lack of privity); Robert & Co. Associates v. Rhodes-Haverty Partnership, 250 Ga. 680, 300 S.E.2d 503 (l983)(lack of privity does not shield engineer from liability to purchasers that foreseeably relied on engineer’s report); American Fidelity Fire Ins. Co. v. Pavia Byrne Engineering, 393 So.2d 830 (La.Ct.App.1981), cert. denied, 397 So.2d 1362 (La. 1981)(engineer liable to performance bond surety for overpayments based on negligent issuance of percent complete certificates). However, the lack of privity defense may still be viable in some jurisdictions. See, e.g., Bryant Electric Co. v. City of Fredericksburg, 762 F.2d 1192 (4th Cir. 1985)(under Virginia law, subcontractor cannot recover for delay from architect absent privity).

To recover damages for delays caused by a supplier, the contractor must be able to prove that the supplier knew of the time constraints and the specific costs that would be incurred if the supplier delayed shipment. This follows the often stated rule of Hadley v. Baxendale, 156 Eng.Rep. 145 (1854) that a party to a contract is not responsible for consequential damages of which he was not aware. See, e.g., U. S. ex rel. Pioneer Steel Co. v. Ellis Construction Co., 398 F.5upp. 719 (E.D.Tenn. 1975); District Concrete Co. v. Bernstein Concrete Corp., 418 A.2d 1030 (D.C.App. 1980); Robberson Steel, Inc. v. T. D. Abrams, Inc., 582 S.W.2d 558 (Tex.Ct.App. 1979); Capital Steel Co., Inc. v. Foster and Creighton Co., 264 Ark. 683, 574 S.W.2d 256 (1978).

3. Concurrent Delay

In the past, most courts followed the rule that neither party could collect from the other where each has contributed to the delay. The courts basically washed their hands of any attempt to apportion delay damages in a situation where both parties were at fault. See, e.g., Gogo v. Los Angeles County Flood Control District, 45 Cal.App.2d 334, 114 P.2d 65 (1941); S.O.G. v. Missouri Pacific Railroad, 658 F.2d 562 (8th Cir. 1981); J.A. Jones Construction Co. v. Greenbriar Shopping Ctr., 332 F.Supp. 1336 (N.D. Ga. 1971), aff'd 461 F.2d 1269 (5th Cir. 1972); Broome Construction, Inc. v. U.S., 203 Ct.CI. 521, 492 F.2d 829 (1974). In each of these cases, the court refused to apportion liquidated damages where the owner and the contractor had each contributed to the overall delay. However, in recent decisions, some courts have attempted to apportion damage claims when either the owner or the contractor can give clear proof that it was not responsible for certain aspects of the overall delay at the project. See, U.S. v. William Klingensmith, Inc., 670 F.2d 1227 (D.C. Cir. 1982); Blinderman Construction Co., Inc. v. U.S., 695 F.2d 552 (Fed. Cir. 1982). California courts have allowed apportionment where the contract contains a “no damage for delay” or “extension of time only” clause. See, e.g., Nomellini Construction Co. v. Department of Water Resources, 19 Ca1.App.3d 240, 96 Cal.Rptr. 682 (1971) and Jasper Construction, Inc. v. Foothill Junior College District, 91 Cal.App.3d 1, 153 Ca1.Rptr. 767 (1979)(statute expressly authorizing liquidated damages provisions in public contracts; apportionment allowed). However, where neither party can separate the concurrent delay, the liquidated damages provision will not be enforced. See, e.g., In re C.D. Murray Co., ENG BCA No. 5018 (October 31, 1988).

4. Contractor Caused Delay

a. Non-Excusable/Excusable Delays

Non-excusable delays are those caused by factors within the control of the contractor, including delays caused by its subcontractors or suppliers. The contractor is not entitled to either time extension or additional compensation for non-excusable delays. Excusable delays are delays for which neither the contractor nor the owner bear responsibility. These include acts of God (such as unusually severe weather), acts of the government, and labor strikes arising from unforeseen causes beyond the control of the contractor. Severe weather alone is not an act of God which will excuse performance because every contractor must contemplate that weather will at times disrupt performance and may delay the project. To be an excusable delay, the frequency, duration, or intensity of the severe weather must be unusual and therefore unforeseeable by the general contractor. See, e.g., Broome Construction, Inc. v. U.S., 203 Ct.Cl. 521, 492 F.2d 829 (974)(unusually severe weather is adverse weather which at the time of the year that it had occurred was unusual for the place in which it had occurred). For a case where a general contractor was excused from delay caused by unusually severe weather, called a “hundred-year flood”, see New Pueblo Construction, Inc. v. State of Arizona, 144 Ariz. 95,696 P.2d 185 (1985).

Typically, the contractor is granted an extension of time to complete that is mutually agreed upon by the owner and the contractor. The contract may contain a clause which allows the architect to arbitrate and to set the time allowed for completion if the two parties cannot agree. See General Conditions of the Contract for Construction, AIA Document A201, 1987 ed., ¶¶ 4.3.8.2 and 4.4. The amount of time allowed for completion should reflect the total time lost and not just the number of days the work was stopped. A delay of two months, for example, might cause a delay of five months if completion is pushed into the winter season.

The general contractor is responsible for delays caused by its subcontractors and suppliers. The contractor should make sure that all subcontracts incorporate the provisions of the prime contract that call for liquidated damages or other damages to be assessed against the contractor in case of delay. If held liable to the owner, the contractor should be able to recover from its subcontractors for any delay damages that resulted directly from the subcontractor’s own delay. The contractor should be wary, however, of blanket incorporation or “flow down” clauses which are discussed below.

b. Subcontractor Delay Claims

The general rule is that the general contractor is liable to the subcontractor for all delay caused by the general contractor that damages the subcontractor. See, e.g., Frank T. Hickey, Inc. v. Los Angeles Jewish Community Council, 128 Cal.App.2d 676, 276 P.2d 52 (Cal.App.1954)(ordinarily, contractor in control of the work is under obligation to make good all losses resulting from delays in the progress of the work not attributable to the subcontractor). The contractor has an implied duty, much the same as the owner has, to cooperate with the subcontractor and to not hinder the subcontractor’s performance. See, e.g., Johnson v. Fenestra, 305 F.2d 179 (3d Cir. 1962)(implied obligation on contractor to facilitate work of subcontractors); Unis v. ITS Constructors/Managers, Inc., 541 So.2d 278 (La.App. 1989)(contractor must schedule and arrange work in a manner that avoids delaying the work of any subcontractor); see also H.H. Robertson Co. v. V.S. DiCarlo General Contractors, Inc., 950 F.2d 572 (8th Cir. 1991)(contractor has implied duty to provide timely access and coordinate its work and the work of the subcontractors). However, the contractor may be able to avoid coordination responsibilities to its subcontractors by a carefully worded disclaimer. See, e.g., L.K. Comstock & Co., Inc. v. United Engineers & Constructors, Inc., 880 F.2d 219 (9th Cir. 1989); see also High Point Sprinkler Co. v. George Hyman Construction Co., 297 S.E.2d 757 (Ga.App. 1982)(contractor successfully delegated duty to coordinate shop drawings among subcontractors).

In the absence of a specific subcontract clause, it has been held that subcontractors do have an implied duty to coordinate the work among each other. At least one court has held that subcontractors do not owe a duty to coordinate with each other and cannot be responsible for another subcontractor’s delay. Morse/Diesel, Inc. v. Trinity Industries, Inc., 859 F.2d 242 (2d Cir. 1988).

To recover for delay, the subcontractor must prove that the contractor caused substantial delay, that the subcontract terms forbid such delay, and that the subcontractor was damaged as a result of the delay. See, e.g., U.S. ex rel. Gray-Bar Electric Co., Inc. v. I.H. Copeland & Sons Construction, Inc., 568 F.2d 1159 (5th Cir. 1978). In other words, the contractor must have breached some term of the subcontract. In most states, the courts state the proposition broadly: “Absent a contractual commitment contra, a general contractor is not liable to its subcontractor for damages flowing from delays incurred by the subcontractor unless the delays were caused by the general contractor or some agency or circumstance under his direction or control.” Doyle & Russell, Inc. v. Welch Pile Driving Corp., 213 Va. 698, 194 S.E.2d 719 (1973); see also, McGrath v. Electrical Construction Co., 230 Or. 295, 364 P.2d 604 (1961)(general rule that the contractor must answer to subcontractor for delays does not apply to delays caused by the owner or its agents); W. Wright, Inc. v. Korshoj Corp., 197 Neb. 692, 250 N.W.2d 894 (1977)(absent contractual commitment, contractor is not liable to subcontractor for delays unless caused by contractor or some agency or circumstance under its control); Loughman Cabinet Co. v. C. Iber & Sons, Inc., 46 Ill.App.3d 873, 361 N.E.2d 379 (Ill.App. 1977)(general conditions of the prime contract, incorporated by reference into the subcontract, permitted extension of the construction period under certain circumstances; contractor not liable to subcontractor).

However, the law in California is “[o]rdinarily, as between a subcontractor and the contractor who is in control of the work being performed, the law places the latter under an obligation to make good all losses consequent on delays in the progress of the work not attributable to the subcontractor.” Frank T. Hickey, Inc. v. Los Angeles Jewish Community Council, 128 Cal.App.2d 676, 276 P.2d 52, 59 (App. 1954). “However, this rule may be made inapplicable by the express provisions of the subcontract.” 276 P.2d at 59. No subsequent California decisions have abrogated this statement of the law. One other California decision that dealt with subcontractor delay did not discuss the rule because the general contractor was clearly liable for the delay. Western Concrete Structures Co. v. Tames 1. Barnes Construction Co., 206 Cal.App.2d 1, 23 Cal.Rptr. 506 (l962)(contractor delayed preparing prestressed concrete slabs that subcontractor was to place; subcontractor allowed to recover for delay from contractor and its surety).

C. CONTRACTUAL CAUSES AFFECTING RECOVERY OF DELAY DAMAGES

Each party to the construction process attempts to put its stamp on the contract to deal with the issues of completion, delay claims, time extensions, and liquidated damages. However, the parties’ expectations as to the effect of these clauses are often dashed by the courts. Asked to interpret or apply such contract clauses, courts often stray from a strict interpretation to justify an intended result. Such actions lead to confusing judicial precedents. This paper will now discuss clauses that affect delay and court interpretations thereof, including standard contract clauses and often-used clauses found in non-standard contracts.

1. Standard Contract Form Clauses

a. American Institute of Architects (AIA)

The 1987 edition of the General Conditions of the Contract for Construction, AIA Document A201, is perhaps the most widely used contract form. ¶ 3.10 requires the Contractor to provide a “construction schedule” to the Architect and Owner that complies with the “time limits current under the Contract Documents.” Most often, the schedule provided is a bar chart showing beginning and end dates. However, given that almost any project may be subject to delay of one type or another, showing how any given delay: may have affected the overall project schedule will be difficult, if not impossible, with a simple bar chart.

In hindsight, many contractors wish they would have taken the time and effort to provide a more detailed schedule, such as a network-based schedule or critical path method (CPM) chart. Developing such a chart or schedule requires a detailed analysis of the project, its fundamental parts, and the inter-relationships of each activity. Providing and maintaining a CPM chart throughout the project can reap rewards if the contractor must show, after the fact, how a delay by the owner or its architect affected the project. However, even if such a chart is utilized, that is no guarantee of a successful delay claim.

Although the CPM analysis is a well-respected tool and may be useful to a trier of facts for ascertaining the impact and interrelationship of Government [owner]-caused delays in project scheduling, its usefulness as a barometer for measuring time extensions and delay damages is necessarily circumscribed by the extent to which it is employed in an accurate and consistent manner to comport with the events actually occurring on the job .... [T]his is the single most important factor in determining the acceptability of a contractor’s delay analysis.

Ballenger Corp., 84-1 B.CA. (CCH) ¶ 16,973 (l983)(DOT CAB No. 74-32)(citations omitted).

Paragraph 8.1 et seq. defines time and all related aspects thereof. 8.2.1. expressly states that time is of the essence. The contractor must “proceed expeditiously with adequate forces and shall achieve Substantial Completion within the Contract Time.” ¶ 8.2.3. Paragraph 8.3.2 states that all claims for delay shall be made in accordance with the applicable provisions of ¶ 4.3. “Substantial Completion” is defined by ¶ 9.8 et seq.

Paragraph 4.3, et seq., governs claims for delay by defining a “claim” as “a demand or assertion by one of the parties seeking, as a matter of right, ... extension of time or other relief with respect to the terms of the Contract.” (¶ 4.3.1). Claims must be made by written notice. (¶ 4.3.1). Paragraph 4.3.8.1 provides that if the contractor wishes to make a claim for an increase in completion time, written notice must be given. The written notice must contain an estimate of the cost and the probable effect of delay on the progress of the work in general. However, the paragraph does not specify to whom the notice must be given.

Paragraph 4.3.3 sets specific time limits on claims: twenty-one days after the occurrence of the events giving rise to the claim or within twenty-one days after the claimant first recognizes the condition giving rise to the claim, whichever is later. The contractor may lose any chance of recovering for delay if the notice provisions are not met. Similarly, ¶ 4.2.11 states that delay caused by the failure of the architect to provide interpretations of the contract documents as required shall not be recognized “until 15 days after written request is made for them.”

If the contractor has failed to comply with the writing requirement, it can attempt to show that the owner was responsible for or had actual or constructive knowledge of the delay, and its impact on the contractor. See, e.g., Peter Kiewit Sons’ Co. v. Pasadena City Junior College Dist., 59 Cal. 2d 241, 379 P.2d 18, 28 Cal. Rptr. 714 (1963)(requirement that requests for extension be in writing not enforceable where owner responsible for delay); Vanderlinde Electric Corp. v. City of Rochester, 54 A.D.2d 155, 158, 388 N.Y.S.2d 388, 391 (1976)(when an owner is fully and continuously aware of project delays, even without notice from the contractor, owner has “a continuing duty to inquire into the causes of such delay and to minimize potential damages”); GB&E Electric Contractors, 87-3 RC.A. (CCH) ¶ 20,119 (1987)(ASBCA No. 34026)(oral notice sufficient); Steve Nanna, Inc., 83-2 B.C.A. (CCH) ¶ 16,692 (1983)(DOT CAB No. 1343)(actual knowledge); Leiden Corp., 83-2 B.C.A. (CCH) ¶ 16,612 (ASBCA No. 26136)(constructive knowledge); contra, Central Penn Industries, Inc. v. Department of Transportation, 25 Pa.Commw. 25, 358 A.2d 445 (Pa.Commw.Ct. 1976)(contractor that encountered unexpected soil conditions not allowed recovery due to failure to comply with requirement to supply written notice to owner of potential delay); Blankenship Construction Co. v. North Carolina State Highway Comm’n, 28 N.C.App. 593,222 S.E.2d 452 (N.C.App. 1976), review denied, 290 N.C. 550, 230 S.E.2d 765 (1976)(no recovery for delay due to unexpected rock where contractor failed to comply with contract requirements of written notice and contemporaneous cost accounts).

b. Association of General Contractors (AGC)

The Standard General Conditions of the AGC Construction Contract drafted by the Engineers Joint Contract Documents Committee addresses claims for delay in Articles 10, 11 and 12. Written notice to the owner and engineer must be made “promptly (but in no event later than thirty days) after occurrence of the event giving rise to the claim ... .” ¶ 12.1 Notice of the “extent of the claim and supporting data shall be delivered within sixty days after such occurrence ... .” ¶ 12.1.

Paragraph 12.2 defines the types of delays for which the contractor may apply for an extension of contract time: “acts of neglect by OWNER or other performing additional work as contemplated by Article 7, or to fires, floods, labors disputes, epidemics, abnormal weather conditions or acts of God:’ Finally, ¶ 12.3 states that time is of the essence.

c. Federal Government Contracts

For the most part, federal contracts contain “no damage for delay” clauses. That is, the contractor is allowed only an extension of completion time for delay caused by the government. To the extent that a subcontract incorporates the prime contract, the subcontractor is bound by such a clause as is the contractor. A representative decision in which the court denied recovery by a subcontractor for delay damages is McDaniel v. Ashton-Mardian Co., 357 F.2d 511 (9th Cir. 1966).

In McDaniel, the subcontractor filed suit against the general and its Miller Act surety for delay damages. The subcontract incorporated the terms of the prime contract which allowed the government to make changes in the work. The subcontract required the subcontractor to “complete this contract within the time herein limited for that purpose or within said term as it may be extended. by reason of delay, changes, additions, or other reasons called for or allowed by the Contractor and Architect and/or Engineer.” Id. at 513. The prime contract allowed 450 days, but the work actually took an additional 196 days. The delay was caused, in part, by thirty-nine change orders. No delay was attributed to the subcontractor. Three of the change orders granted the contractor additional time covering the delay period. The contractor finished within the time allowed by the extension. When the subcontractor filed its action, the contractor pursued its administrative remedies against the government. After losing before several administrative boards, the parties returned to the district court which denied relief to the subcontractor.

The subcontractor based its claim in the district court on two grounds: tort and contract. As to the tort claim, the Ninth Circuit noted that the prime contract allowed the government to make changes without additional liability for delay and, therefore, the contractor was required to accept the changes with only an extension of time for performance. Therefore, there was no wrongful act on which the subcontractor could base a tort claim. Id. at 515.

As to the contract claim, the subcontractor claimed it would be unfair to keep subcontractors on the project during periods of delay without compensation. The Ninth Circuit noted that it was equally problematic if “[contractor] could recover nothing for delays caused by change orders it was obligated to carry out, yet would be liable to each of its subcontractors whose work was delayed by changes.” Id. at 516.

Resolving this dilemma, the court adopted the district court’s opinion:

[The] provisions of the subcontract and the General Contract make it clear that both [subcontractor] and [contractor] knew when they entered into the subcontract that it could ... happen that the work under the subcontract would not be completed within the 450 days specified in the General Contract; that changes might be made by the United States which would necessarily extend the performance period of the General Contract and, subsequently, the performance period of the subcontract. Both ... knew, also, that if any changes authorized by Section 3 and ordered by United States should result in delay damages to [contractor], no compensation ... could be recovered ... from the United’ States. Hence, it is reasonable to conclude that [they] did not intend their subcontract to mean that [subcontractor] could recover from [contractor] for delays occasioned by proper change orders of the United States.

Id. at 516. The Ninth Circuit finished its opinion with this general statement:

Potential damage from delay is inherent in any construction contract. If the delay results from action which the party causing the delay was authorized by the contract to take, it would be difficult, in any case, to justify the award of delay damages to another party to the contract. When the party causing the delay is the United States Government, and the contract is the standard government contract, it is impossible, in the face of the precedents which we have cited, to find an equitable reason why a prime contractor, without fault and without option and without right of reimbursement from the Government, should have to compensate his subcontractor for damages resulting from delayed performance.

Id. at 517.

Subsequent federal cases have distinguished the McDaniel decision on its facts. In Havens Steel Co. v. Randolph Engineering Co., 613 F.Supp. 514 (W.D. Mo. 1985), the court also was faced with a subcontractor claiming for delay, some of which was caused by the architect, some by the general contractor. The subcontract did not contain a “no damage for delay” clause. In allowing recovery, the court reasoned:

While it is true (absent a contrary contractual provision) that a general contractor will ordinarily not be liable to its subcontractor for damages resulting from delay, unless the delay is in fact caused by the general contractor or some agency or circumstance under its control, [citing McDaniel, McGrath, Doyle & Russell, Frank T. Hickey, Inc.], that principle does not require, in cases of multiple causation involving the general contractor and others, that the subcontractor show the proportional part played by the general contractor and segregate the loss accordingly. ... The rule to be applied in that situation is instead the ordinary contracts rule applicable to damages involving multiple causes: that if the defendant’s breach or fault was a “substantial factor” in causing the injury, the defendant will bear full responsibility for it even though there were other, contributing causes. [Contractor’s] delays were clearly a “substantial factor” in causing the damages here. The fact that [the architect] or other parties may have also played some part in connection with the problem is immaterial.

Id. at 532.

Subcontractors should be aware that even where the contractor may have failed to disclose changes to the project’s schedule, allegedly delaying and disrupting a subcontractor, recovery for delay may not be clear cut if there is a no damage for delay clause in the subcontract. See, e.g., Crawford Painting and Drywall Co. v. I.W. Bateson Co., 857 F.2d 981 (5th Cir. 1988).

d. State Contracts

Unlike the federal government, some states disfavor “no damage for delay” clauses in their contracts. In California, the Public Contracts Code § 7102 states:

Contract-provisions in construction-contracts of public agencies and subcontracts thereunder which limit the contractee’s liability to an extension of time for delay for which the contractee is responsible and which delay is unreasonable under the circumstances involved, and not within the contemplation of the parties, shall not be construed to . preclude the recovery of damages by the contractor or subcontractor.

No public agency may require the waiver, alteration, or limitation of the applicability of this section. Any such waiver, alteration, or limitation is void.

Cal.Pub.Cont. Code§ 7102.

Therefore, in California or any other state with similar laws, it may be argued that federal cases involving no damage for delay clauses are distinguishable and should not be followed in those jurisdictions.

2. Non-Standard Contract Causes

a. Exculpatory Clauses

A typical clause found in a subcontract may be written as follows:

No claims for additional compensation or damages for delays, whether caused in whole or in part by any conduct on the part of the Contractor, including, but not limited to, conduct amounting to a breach of this Agreement, or delays by other subcontractors or Owner, shall be recoverable from Contractor, and the above mentioned extension of time for completion shall be the sole remedy of Subcontractor, provided, however, that ... .

Such a clause is sometimes referred to as an “exculpatory clause.” See, e.g., Atlantic States Construction, Inc. v. Hand, Arendall, Bedsole, Greaves and Johnson, 892 F.2d 1530 (11th Cir. 1990)(exculpatory clause serves the purpose of insulating the general contractor itself from the possibility of being (1) liable to the subcontractor for delay caused by the government, yet (2) unable to recover from the government). Subcontractors must be aware that the effect of any such clause in their subcontracts may prevent recovery for any delay.

b. “Flow-Down” Clauses

Subcontractors also should be aware that their subcontracts may contain so-called “flow-down” clauses that effectively incorporate every delay damage-related clause from the prime contract into the subcontract. The typical flow-down clause states that the subcontractor assumes towards the contractor all the duties, obligations, and liabilities the contractor has assumed toward the project owner. However, there must be some limit on the application of these clauses because if enforced as written, the subcontractor would be liable to build the entire project.

The general position taken by federal courts has been that broad flow-down clauses incorporate only the applicable work requirements of the prime contract, not the procedural or administrative provisions. See, e.g., U.S. ex rel. N.U., Inc. v. Gulf Ins. Co., 650 F.Supp. 557 (S.D.Fla. 1986)(“disputes” provision of federal prime contract not imposed on subcontractors by virtue of broad flow-down provision); Wollf & Munier, Inc. v. Whiting-Turner Contracting Co., 946 F.2d 1003 (2d Cir. 1991)(general flow-down clause does not incorporate “no damage for delay” clause in prime contract). Other federal courts have denied the application of a flow-down clause where the effect would be to deny the subcontractor its Miller Act rights. See, e.g., Fanderlik-Locke Co. v. U.S. ex rel. M.B. Morgan, 285 F.2d 939 (l0th Cir. 1960), cert. denied, 365 U.S. 860 (l961)(notwithstanding flow-down clause as to arbitration, subcontractor could proceed on Miller Act claim while arbitration pending).

State courts appear to be less forgiving and, in general, enforce broad flow-down clauses. See, e.g., Air Cooling & Energy, Inc. v. Midwestern Construction Co., 602 S.W.2d 926 (Mo.App. 1980)(owner’s site condition disclaimer in prime contract enforced via flow-down clause in subcontract) c.f., Sanders Co. Plumbing and Heating, Inc. v. City of Independence, 694 S.W.2d 841 (Mo.App. 1985)(owner’s site condition disclaimer not effective to place burden on contractor); Sime Construction Co. v. Washington Public Power Supply System, 28 Wash.App. 10, 621 P.2d 1299 (1980), review denied, 95 Wash.2d 1012 (1981)(fifteen day notice of claim provision in prime contract incorporated into subcontract via flow-down clause enforced to deny subcontractor’s claim beyond fifteen day limit).

In summary, subcontractors must be aware of all terms and provisions in the prime contract dealing with delay claims, whether such provisions are in their subcontracts or not. A broad flow-down clause may require the subcontractor to give notice of a delay within a certain number of days as required by the prime contract. Further, given a broad flow-down clause, the contractor may be able to enforce a “no damage for delay” clause in the prime contract against the subcontractor although the subcontract does not contain a “no damage for delay” clause.

3. Enforceability of “No Damage for Delay” Clauses

The most common type of clause that will prevent a contractor’s delay claim is the “no damage for delay” clause. Courts generally uphold this type of clause as long as it is free from ambiguity and reflects the intent of the parties as reasonably interpreted. See, e.g., Blake Construction Co. v. C.T. Coakley Co., 431 A.2d 569 (D.C. 1981)(courts will uphold the clause unless the contractor can show delays not contemplated by the parties, delay amounting to abandonment of the contract, bad faith, or active interference); see also M.A. Lombard & Son Co. v. Public Building Commission of Chicago, 101 Ill.App.3d 514, 428 N.E.2d 889 (1981)(intent of the parties clear by inserting clause that no damage for delay was contemplated; clause upheld); accord John E. Gregory & Son, Inc. v. A. Guenther & Sons Co., 147 Wis.2d 298, 432 N.W.2d 584 (1988).

Because of the often harsh effect of a no damage for delay clause, the courts will typically construe ambiguous clauses against the drafter/owner. See, e.g., Ace Stone, Inc. v. Township of Wayne, 47 N.J. 431, 221 A.2d 515 (1966); Giametta Assoc., Inc. v. T.T. White, Inc., 573 F. Supp. 112 (E.D. Pa. 1983). Because the clause may cause a contractor to forfeit its claim, some jurisdictions hold that the owner bears the burden of proving that the particular delay damage claim falls within the scope of the no damage for delay clause. See, e.g., Hawley v. Orange County Flood Control Dist., 211 Cal. App. 2d 108, 27 Cal. Rptr. 478 (1963); F.D. Rich Co. v. Wilmington Housing Authority, 392 F.2d 841 (3d Cir. 1e.g.,68).

The courts make two inquiries into no damage for delay clauses. First, the court determines what the scope of the clause is as evidenced by its express language. Does the clause mention both excusable and unexcusable delays? Does it distinguish between unexcusable delay and interference? Second, the court determines whether the specific type and source of the delay were within the contemplation of the parties to the agreement. For example, was “active interference” by the owner contemplated?

To avoid the effect of a no damage for delay clause, the contractor must show that the delay encountered falls within one of the well-recognized exceptions: (1) that the delay encountered was not contemplated by the parties; (2) fraud, misrepresentation, or other bad faith; (3) delay resulting in abandonment; (4) delays not specifically enumerated in the written contract. See, e.g., City of Houston v. R.F. Ball Construction Co., 570 S.W.2d 75 (Tex.Civ.App. 1978). For a complete overview of these exceptions, see the Annotation, Validity and Construction of “No Damage” Clauses With Respect to Delay in Building or Construction Contracts, 74 A.L.R.3D 187 (1976) (general analysis of the validity of no damages for delay clauses) and Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F.Supp. 376 (S.D. Iowa 1973). The burden is, of course, on the contractor to prove that the delay falls within the exception. See, e.g., Dickinson Co. v. Iowa State Dep’t of Transportation, 300 N.W.2d 112 (Iowa 1981).

For two representative cases discussing no damage for delay clauses, see City of Seattle v. Dyad Construction Co., 17 Wash.App. 501,565 P.2d 423 (1977) (where a sewer line contractor recovered delay damages from the City because of demands that the contractor perform beyond the scope of the contract and the City’s interference with the contractor’s performance) and Housing Authority of the City of Dallas v. Hubbell, 32 S.W.2d 880 (Tex. Civ.App. 1959) (where the City was precluded from using an exculpatory no damage for delay clause because it failed to provide master construction schedules, did not coordinate various prime contractors on the site, and did not permit work to proceed in on orderly manner).

a. Unforeseen and Uncontemplated Delays

There are a number of decisions holding that a no damage for delay clause cannot operate as to unforeseen or uncontemplated delays. See, e.g., E.C. Ernst, Inc. v. Manhattan Construction Co. of Texas, 551 F.2d 1026 (5th Cir. 1977), reh’g denied in part, granted in part, 559 F.2d 268 (5th Cir.1977), cert. denied, Providence Hospital v. Manhattan Construction Co. of Texas, 434 U.S. 1067, 98 S.Ct. 1246, 55 L.Ed.2d 769 (1978); John E. Green Plumbing & Heating Co. v. Turner Construction Co., 500 F.Supp. 149 aff'd 305 F.2d 216 (3d Cir. 1962)(clause did not contemplate hindrance); Hawley v. Orange County Flood Control Dist., 211 Cal. App. 2d 108, 27 Cal. Rptr. 478 (1963); Department of Transportation v. Arapaho Construction. Inc., 257 Ga. 269,357 S.E.2d 593 (Ga. 1987); c.f. F.D. Rich Co. v. Wilmington Housing Authority, 392 F.2d 841 (3rd Cir. 1968)(delay clearly foreseen does not fall within recognized exception).

Other jurisdictions have held the opposite, however, based on the reasoning that as parties can specifically bargain for foreseeable delays, it is the unforeseeable delays that such clauses were intended to address. Note, however, that these decisions reflect what appears to be the minority position. See. e.g., John E. Gregory & Son, Inc. v. A. Guenther & Sons, Co., 147 Wis.2d 298, 432 N.W.2d 584 (1988); State Highway Administration v. Greiner Engineering Sciences, Inc., 83 Md.App. 621,577 A.2d 363 (1990)(no damage for delay clause upheld even as to unforeseen delay); City of Houston v. R.F. Ball Construction Co., 570 S.W.2d 75 (Tex.Civ.App. 1978)(where clause unambiguous, it will be enforced).

A contractor delayed by a differing site condition but faced with a no damage for delay clause might argue that the differing site condition is per se unforeseen and, therefore, the no damage for delay clause should not operate. However, because most federal and state contracts contain differing site condition or suspension of work clauses, it is difficult to argue that the parties did not contemplate a differing site condition. See, e.g., Calumet Construction Corp. v. Metropolitan Sanitary Dist. of Greater Chicago, 222 Ill.App.3d 374, 581 N.E.2d 206 (l991)(“suspension of work” clause required in all E.P.A. funded projects applied to defeat recovery by contractor); P.T. & L. Construction Co. v. State of N.J. Dep’t of Transp., 108 N.J. 539,531 A.2d 1330 (1987)(excellent overview of differing site condition and no damage for delay clauses). Of course, if the contractor is in a jurisdiction, such as New York, wherein no damage for delay clauses are strictly upheld whether the contract contains a differing site condition clause or not, arguing the site condition was unforeseen will not void the operation of the clause. See, e.g., Blau Mechanical Corp. v. City of New York, 158 A.D.2d 373, 551 N.Y.S.2d 228 (1990) and Davis Construction Corp. v. County of Suffolk, 149 A.D.2d 404,539 N.Y.S.2d 757 (1989), appeal denied, 74 N.Y.2d 615,549 N.E.2d 151,549 N.Y.S.2d 960 (1989).

b. Owner Interference Exception

Most jurisdictions require that the owner’s actions which cause delay must be clear and egregious to find such active interference as to negate the effect of a no damage for delay clause. Intentional misconduct of the owner or his agents, including the architect or other prime contractors, certainly constitutes active interference. But the contractor usually must prove more than simple mistake, error in judgment, lack of total effort, or lack of diligence. For example, the New York Court of Appeals in Kalisch-Jarcho, Inc. v. City of N.Y., 58 N.Y. 2d 377, 448 N.E. 2d 413 (1983) held that even “active interference” was insufficient basis to avoid a no damage for delay clause. The court required the contractor to demonstrate the owner’s “bad faith and deliberate intent” to delay the contractor before recovery of delay damages would be allowed. However, the court hinted that the owner’s “gross negligence” might be sufficient to allow delay damage recovery.

The New York Court of Appeals revisited the Kalisch-Jarcho decision in Corinno Civetta Construction Corp. v. City of New York, 67 N.Y. 2d 297, 493 N.E.2d 905 (1986). In Corinno Civetta, the court held that negligent interference by the owner is not enough to allow the contractor to avoid a no damage for delay clause. The contractor must show interference was the result of willfulness, bad faith, or breach of a fundamental term of the contract. See also Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F.Supp. 376 (S.D. Iowa 1973).

Other jurisdictions will negate a no damage for delay clause if the contractor can show only negligent interference by the owner. See, e.g., John E. Green Plumbing and Heating Co., Inc. v. Turner Construction Co., 742 F.2d 965 (6th Cir. 1984)(exculpatory clauses strictly construed under Michigan law); Newberry Square Development Corp. v. Southern Landmark, Inc., 578 So.2d 750 (Fla.App. 1991)(owner’s negligent failure to have the drawings available to commence work sufficient owner interference to justify an award of damages notwithstanding a no damage for delay clause).

Some states have passed legislation effectively voiding no damage for delay clauses where the owner attempts to absolve itself of all liability for its own acts. Such a bill was passed in Washington in response to the case of Nelse Mortensen & Co. v. Group Health Cooperative of Puget Sound, 17 Wash.App. 703, 566 P.2d 560, aff'd 90 Wash.2d 843, 586 P.2d 469 (1978) wherein the court upheld a finding that the contractor was forced to absorb delay costs arising from numerous substantial changes and untimely specification changes because the owner had included a no damage for delay clause. Because of the egregious facts of Nelse Mortensen, the Washington legislature decided that no damage for delay clauses should not be upheld. Wash.Rev.Code Ann. §§ 4.24.360-.380 (1988). California has also passed similar legislation. See, e.g., California Public Contracts Code § 7102.

c. Denial of Site Access

Denial of site access is another widely recognized exception to the operation of a no damage for delay clause. See, e.g., U.S. Steel Corp. v. Missouri Pacific Railroad Co., 668 F.2d 435 (8th Cir. 1982)(owner failed to have bridge substructure completed prior to contractor’s work on superstructure; contractor allowed to recover for delay notwithstanding no damage for delay clause). However, the Ohio Supreme Court has held that denial of site access before the contractor mobilizes on site does not negate a no damage for delay clause. Carrabine Construction Co. v. Chrysler Realty Corp., 250 Ohio St.3d 222, 495 N.E.2d 952 (Ohio 1986). Therefore, the contractor should be aware that an owner’s failure to provide site access does not provide a guaranteed waiver of a no damage for delay clause or a guaranteed recovery for delay. See, e.g., Appeal of Volpe-Head, Joint Venture, ENG BCA No. 4726 (July 14, 1989)(government’s failure to provide site access for several months concurrent with contractor’s failure to acquire approval of excavation submittal; no recovery).

D. OWNERSHIP OF FLOAT

Defined simply, “float” is that period of time within which any given activity may be performed before the activity impacts the critical path. One court defined float as “the difference between the earliest allowable completion date and the latest allowable completion date.” L.K. Comstock & Co.. Inc. v. United Engineers & Constructors, Inc., 880 F.2d 219, 230 n. 19 (9th Cir. 1989). However float is defined, both owners and contractors dispute who owns the float. That is, who is entitled to delay the project without incurring liability for delay damages because the delayed activity did not impact the critical path.

In their article, “How to Recognize, Preserve, Present, and Prosecute Construction Contractors’ Delay Claims,” South Carolina Law Review, Vol. 40, pg. 943, Summer 1989, authors Asselin and Harris-Helms discuss the ownership of “float.” Contractors argue that they own the float because they are responsible for and have control over the “means, methods, techniques, sequences and procedures for coordinating all portions” of construction. See, General Conditions of the Contract for Construction, AIA Document A201 ¶ 3.3.1 (1987). According to this argument, contractors should be entitled to whatever benefits flow from their shouldering the “means, methods, techniques, sequences and procedures” responsibilities. All additional time the contractor can incorporate into its schedule should be available to it to compensate for schedule deficiencies or for delays which are due to the contractor or its subcontractors. Of course, the contractor can always choose to “front-end load” the beginning of the schedule with float so that the benefit of the float time will not be denied it later in the project. The contractor can provide this version of the schedule to the owner and, thus, can effectively deny the owner the use of a real schedule for monitoring purposes.

The owner’s view is that, based upon contract language, float belongs to it. Contracts often state in an indirect fashion that the owner is entitled to the float. For example, a contract may indicate that the contractor will be granted a time extension only if the project completion date is extended as a result of delay. See, e.g., Rapp v. Mountain States Tel. & Tel., 606 P.2d 1189 (Utah 1980). Another view is essentially one of “first in time, first in right;” in other words, the float should be used by the first party who needs to make up for delay, consistent with the overall best interests of the project. Under this view, the contractor may be denied use of the float if the owner, while using the float for the good of the project, earlier makes up for an owner-responsible delay.

There is a surprising dearth of reported cases regarding ownership of float. The majority of cases cited by Asselin and Harris-Helms are Board of Contract Appeals decisions. Some decisions support the contractor’s right to float time, See, e.g., Fischbach & Moore Int’l Corp., 77-1 B.CA. (CCH) ¶ 12,300 (l977) (ASBCA No. 18146); Ferguson-Crowley, Inc., 68-2 B.CA. (CCH) ¶ 7,194 (l968) (ASBCA Nos. 11124, 11307, 12088); Continental Consolidated Corp., 67-2 B.C.A. (CCH) ¶ 6,624 (l967) (ENG BCA Nos. 2743, 2766), aff'd in part, 200 Ct. Cl. 737 (l972); Heat Exchanges, Inc., 1963 B.CA. (CCH) ¶ 3881 (l963) (ASBCA No. 8705), while other cases support the owners’ entitlement. See, e.g., Ballenger Corp., 84-1 B.CA. (CCH) ¶ 16,973 (l983) (DOT CAB No. 74-32); Arntz Bros., 79-2 B.C.A. (CCH) ¶ 14,038 (l979) (ASBCA Nos. 19183); Dawson Construction Co., 75-2 B.CA. (CCH) ¶ 11,563 (l975) (GSBCA No. 3998). One court has even held that for a contractor to recover in the event of concurrent delay, the contractor must show that the owner’s delay affected a critical path activity while its delay affected only float activities. Fischbach & Moore Int’l Corp., 77-1 B.C.A. (CCH) ¶ 12,300 (l977) (ASBCA No. 18146).

Only a few federal district court and circuit court decisions were found in which the court even mentioned float, let alone discussed who owned it. See, e.g., Comstock, 880 F.2d at 230 n. 19, supra. In Natkin & Co. v. George A. Fuller Co., 347 F. Supp. 17, 31 (W.D. Mo. 1972), the court discussed “float” in its findings of fact: “Total float may be used to schedule jobs for all contractors; free float belongs to one contractor for scheduling anyone activity. Neither total nor free float is to be used for changes.” Finally, one court discussed float while defining “critical path”:

The critical path is the longest series of the work activities through the performance of a whole project. If an activity on the critical path exceeds its scheduled duration, the termination of the project will be delayed unless some other activity on the critical path is performed in less than its scheduled time. A work activity not on the critical path may be completed later than its scheduled time without affecting the termination of the project unless the noncritical activity exceeds its “float” and thereby becomes an activity on the critical path.

United States Fidelity & Guaranty Co. v. Orlando Utilities Comm’n, 564 F. Supp. 962,968 (M.D.Fla.1983).

The authors agree with the Comstock definition of float as the time between contractor-scheduled completion and owner-allowed completion. Many courts, without mentioning the word “float,” have permitted the contractor to recover damages for interference with early completion. See, e.g., Grow Construction Co. v. State, 56 A.D.2d 95, 391 N.Y.S.2d 726 (App. 1977); Housing Auth. of City of Texarkana v. E.W. Johnson Construction Co., 264 Ark. 523, 573 S.W.2d 316 (1978); Weaver-Bailey Contractors, Inc. v. U.S., 19 Cl.Ct. 474 (1990); Metropolitan Paving Co. v. U.S., 163 Ct.Cl. 420, 352 F.2d 241 (Ct.Cl. 1963). These well-reasoned cases, without explicitly referring to float; have in effect determined that the float belongs to -the contractor.

E. LIQUIDATED DAMAGES AS SWORD AND SHIELD

1. Limitation on the Recoverability of Liquidated Damages When a Project is Delayed.

It is well-settled that liquidated damage clauses are valid and enforceable, as long as a particular clause does not operate as a penalty. In determining whether a liquidated damages provision constitutes a penalty, early courts applied many different tests. See, e.g., Keeble v. Keeble, 5 So. 149 (Ala. 1888)(ten different criteria to measure whether liquidated damages clause was a penalty). More recently, however, the following two criteria are applied by most jurisdictions:

1. The actual damages caused by a breach will be difficult or impossible to accurately estimate; and

2. The sum stipulated is a reasonable pre-estimate of the probable loss.

See, e.g., Southeastern Land Fund, Inc. v. Real Estate World, Inc., 237 Ga. 227, 227 S.E.2d 340 (1976).

Even if a contract remedy meets the two elements set forth above, the contract may still be penal in nature if the stipulated sum does not set the measure of the damages recoverable. Cheatham v. Kem Manufacturing Corporation, 372 So.2d 1085 (Miss. 1979). For example, a contract provision allowing the party to choose between liquidated or actual damages did not provide for valid liquidated damages and instead acted as a penalty. See, e.g., Pappas v. Deringer, 145 So.2d 770 (Fla. App. 1962)(“may at their-option” language, which allowed lesser to elect actual or liquidated damages, made clause void as a penalty); Sheffield v. Paul T. Stone, Inc., 98 F.2d 250 (D.C. Cir. 1938)(party cannot choose between liquidated and actual damages after determining which is greater).

Both owners and contractors on private projects should be aware that the easiest way to defeat a liquidated damages clause is to show that the owner made no attempt to set a stipulated sum that approximated a reasonable forecast of the actual damages. See, e.g., San-Ore Gardner v. Missouri Pacific Railroad Co., 658 F.2d 562 (8th Cir. 1981). The same is not true as to public projects, especially in states that have passed legislation that liquidated damages are favored in public works projects and are prima facie reasonable. See, e.g., California Public Contracts Code § 10226; Westinghouse Electric Corp. v. City of Los Angeles, 129 Cal.App.3d 771, 181 Cal.Rptr. 332(l982)(damages for delay particularly difficult to ascertain in public projects); Taos Construction Co. v. Penzel Construction Co., Inc., 750 S.W.2d 522 (Mo. 1988)(public entity allowed to recover liquidated damages on showing of breach alone; no need to show actual damages).

A number of Board of Contract Appeals decisions have struck down liquidated damage clauses where the government entity reduced the per diem charge. See, e.g., Appeal of Coliseum Construction Co., ASBCA No. 36642 (December 6, 1988)(liquidated damages clause lowered from $1,820.00 per day to $220.00 was admission that no reasonable estimate had been made at contract formation; clause struck down); Appeal of Dave’s Excavation, ASBCA No. 36161 (June 8, 1988)(government guidelines called for $50.00 per day, contract used $125.00 per day without reasonable explanation; clause struck as unenforceable penalty).

As discussed previously, contractors often insert incorporation or “flow clauses in their subcontracts, in an attempt to pass through liquidated damages provisions to the subcontractors. However, to the extent that a small subcontractor delays the project, resulting in an amount of damages disproportionate to the amount of its subcontract, the subcontractor may argue that enforcement of the clause results in a penalty. If the court holds the incorporated liquidated damages clause void as a penalty, the contractor can counter that is entitled to recover its actual damages: what was assessed against it due to the delay, which is the liquidated damage amount.

Contractors that attempt to apportion liquidated damages by proportioning the per diem amount rather than allocating the number of days should be aware of the Board of Contract Appeals cases cited previously. Take, for example, the scenario where a contractor is delayed for sixty days because three subcontractors concurrently delayed the project. Assume a liquidated damages provision of $600.00 per day in the prime contract and a flow-down clause in each of the subcontracts. The contractor is assessed $36,000.00 by the owner. The contractor may try to charge each subcontractor $600.00 per day for a total recovery of $108,000.00, but will be unsuccessful when the subcontractors learn of the contractor’s windfall at their expense. The subcontractors will argue that assessing each of them the full amount, $600.00 per day, is a penalty.

However, under a strict liquidated damage analysis, as to each subcontract the estimated amount of damage, if that subcontractor delayed the contractor, is $600.00 per day. Therefore, the contractor responds, the clause should be upheld. The subcontractor then must argue that the flow-down clause is not a true liquidated damage provision because damages were not difficult to ascertain at the time of contracting; indeed, the parties knew the damages to the contractor would be $600.00 per day.

If the contractor attempts to apportion the amount by enforcing liquidated damages at a reduced per diem of $200.00 per day for each subcontractor, it merely provides more arguments to void the liquidated damages clause. First, reducing the amount is tantamount to admitting it was unreasonable; therefore, the clause is void as a penalty. See, e.g., Appeal of Coliseum Construction Co. supra. Second, the jurisdiction the contractor is in may not permit apportionment of liquidated damages. See, e.g., Gogo v. Los Angeles County Flood Control District, 45 Cal.App.2d 334, 114 P.2d 65 (1941). Finally, the subcontractors will argue each of them are not liable for an equal amount of delay and, therefore, the allocation is too speculative or uncertain to support an award of damages against it.

A better approach would be for the contractor to assess each subcontractor the best estimate of the number of days it actually delayed the project and assess liquidated damages at the full rate of $600.00 per day. See, e.g., Mattingly Bridge Co., Inc. v. Holloway & Son Construction Co., 694 S.W.2d 702 (Ky. 1985). In this way, the contractor is fully reimbursed and each subcontractor is fairly required to pay for the delay it caused.

Perhaps the best approach from the contractor’s standpoint is to argue that it is not assessing liquidated damages but rather is assessing actual damages. The flow-down clause merely put the subcontractors on notice that liquidated damages assessed by the owner would be a component of the actual damages assessed against the subcontractor if it delayed the project. There are two advantages to this approach. First, the contractor does not have to deal with the trappings of liquidated damage provisions and the arguments outlined above. Second, and most important, the contractor can also assess its own actual damages for the sixty additional days its employees were on the project.

If the contractor attempts to assess both the liquidated damages it paid plus the actual delay damages it incurred, subcontractors may argue that the “flow-down” clause is really a liquidated damage provision and that the contractor cannot claim

both liquidated and actual damage. For a good discussion of liquidated damages in a similar fact situation, see Ely v. Bottini, 179 Cal.App.2d 287, 3 Cal.Rptr. 756 (1960), where the court specifically allowed the general contractor to allocate to a subcontractor the liquidated damages assessed by the owner. In that case, the court answered the subcontractor’s argument that damages were too speculative as follows:

While Civil Code section 3301, provides that no damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and origin, the fact that the amount of damage may not be susceptible of exact proof or may be uncertain, contingent or difficult of ascertainment does not bar recovery. ... One whose wrongful conduct has rendered difficult the ascertainment of damages cannot escape liability because the damages could not be measured with exactness.

3 Cal.Rptr. at 761.

As to the subcontractor’s argument that the contractor could not apportion liquidated damages citing Gogo v. Los Angeles County Flood Control Dist., the court held it was inapplicable because there was no contention that the owner, McCarthy, was responsible for any delay and the damages assessed were actual damages and not liquidated damages “so that the special rule with regard to penalties is not applicable.” 3 Cal.Rptr. at 762.

Finally, because the subcontractor offered evidence that the contractor caused some of the delay, it argued Gogo should still apply to prevent any apportionment. The court rejected that argument:

But a different rule is applicable as between a contractor and subcontractor where the primary contract with the owner provides a penalty for delay and the contractor and subcontractor are each responsible for part of the delay. The rule in such case is ... ‘A subcontractor is bound by a [liquidated damage] clause contained in the original contract ... and if in such a case both the contractor and the subcontractor are the cause of the delay, each should bear his respective proportion of the damage resulting therefrom.

3 Cal.Rptr. at 763.

Although it would seem that subcontractors should try to avoid flow-down clauses that incorporate a prime contract liquidated damages clause, such a battle may not always be the best strategy. In Industrial Indemnity Co. v. Wick Construction Co., 680 P.2d 1100 (Alaska 1984), a subcontractor sued the general contractor for payment. The contractor counterclaimed and asserted the subcontractor had delayed the project 414 days. On appeal, the Alaska Supreme Court held the subcontractor was liable for 264 days of delay but struck down the trial court’s award of $765,654.00 to the contractor for delay damages. The court held that the subcontract had incorporated by reference the liquidated damages clause from the prime contract: $400.00 per -day. Therefore, the award should have been only $105,600.00 (264 x $400.00), saving the subcontractor $660,000.00. For similar “flow-through” cases, see McDaniel v. Ashton-Mardian Co., 357 F.2d 511 (9th Cir. 1966) and Coast Sash and Door Co. v. Strom Construction Co., 65 Wash.2d 279, 396 P.2d 803 (1964).

Some courts hold that the party seeking to enforce a liquidated damage clause need not show any injury. See, e.g., Mechanical Air Engineering Co. v. Totem Construction Co., 166 Ariz. 191, 801 P.2d 426 (App.1989)(other than proof that liquidated damage amount reasonably related to actual damages, no proof of actual damages need be made; clause valid against subcontractor although owner did not charge contractor for delay). The reasoning behind this position was stated in Litton Industries Credit Corporation v. Catanuto, 175 Conn. 69, 71,394 A.2d 191, 193 (1978): “The very purpose for which such provisions are sustained is to obviate the difficulties of proof of actual damage, once such a provision is found to be valid, no proof of the true amount of injury is required.” See also Public Health Trust of Dade County v. Romart Construction, Inc., 577 So.2d 636 (Fla.App. 1991)(if valid liquidated damages clause, actual damages need not be proven).

Other jurisdictions have held that if no actual damages are sustained, a liquidated damages clause will not be enforced. See, e.g., Wehr Constructors, Inc. v. Steel Fabricators, Inc., 769 S.W. 2.d 51 (Ky. 1989); Norwalk Door Closer Co. v. Eagle Lock and Screw Co., 153 Conn. 681, 220 A.2d 263 (l966)(if no actual damages, liquidated damages clause will not be enforced). If a liquidated damages provision is incorporated into a subcontract by a “flow-down” clause, a court may hold that because the clause was a pass-through obligation, if liquidated damages were not assessed by the owner against the general contractor, none could be assessed against the subcontractor. See, e.g., Pierce Associates, Inc. v. Nemours Foundations, 865 F.2d 530 (3d Cir. 1989).

As to concurrent delay and liquidated damages, in the past courts refused recovery to either party. See, e.g., J.A. Jones Construction Co. v. Greenbriar Shopping Center, 332 F. Supp. 1336 (N.D. Ga. 1971), aff'd, 461 F.2d 1269 (5th Cir. 1972); Medema Homes, Inc. v. Lynn, 647 P.2d 664 (Colo. 1982). In effect, the owner could not enforce the liquidated damages clause and the contractor was unable to recover delay damages. With the advent of CPM or similar scheduling techniques, courts are more willing to apportion delay. See, e.g., Pathman Construction Co. v. Hi-Way Electric Co., 65 lll.App.3d 480, 382 N.E.2d 453 (1978); Keith v. Burzynski, 621 P.2d 247 (Wyo. 1980); E.I.T. Constr. Co., 83-2 B.CA. (CCH) ¶ 16,712 (1983) (ASBCA No. 22795). In such cases, the moving party has the burden of showing entitlement to the damages. See, e.g., In re Blackhawk Heating & Plumbing Co., 76-1 B.C.A. (CCH) ¶ 11,649 (1976)(GSBCA No. 2432). The contractor must be able to show that the owner’s delay affected a critical path activity while its delay affected only float activities. See, e.g., Fischbach & Moore Int’l Corp., 77-1 B.C.A. (CCH) ¶ 12,300 (1977) (ASBCA No. 18146); c.f., Wilner v. United States, 23 Cl.Ct. 241 (1991)(concurrent delay off critical path does not prevent recovery for owner-caused delay on critical path). If the contractor’s delay affected the critical path, it may not be able to recover delay damages. See, e.g., Commerce Int’l Co. v. United States, 338 F.2d 81 (Ct. Cl. 1964). If, however, the contractor can show that the owner’s delays which affected the critical path exceeded those of the contractor, it may be able to recover its apportioned delay damages. See, e.g., Blake Constr. Co., 82-1 B.C.A. (CCH) ¶ 15,688 (1982) (ASBCA No. 24356).

2. Waiver of Liquidated Damages in Lieu of Actual Damages

In general, the courts have held that, where a contract contains a provision for liquidated damages, the contract will control. See, e.g., Davis v. Tucson Arizona Boys Choir Society, 137 Ariz. 228,669 P.2d 1005 (App. 1983); Hall Construction Co. v. Beynon, 507 So.2d 1225 (Fla.App1987)(if a contract provides for liquidated damages for delay, the party claiming damages will be entitled only to the liquidated damages). Where a contract contains a provision for liquidated damages, actual damages are immaterial, and the parties are bound to accept the amount set forth in the contract. Brewer v. Nyers, 545 S.W.2d 235 (Tex. App. 1976); Siler v. Marshall, 251 Md. 342, 247 A.2d 385 (App. 1968); see also Northern Illinois Gas Co. v. Energy Cooperative Inc., 122 Ill. App. 3d 940, 461 N.E.2d 1049 (1984). Even if the actual damages far exceed those provided by a liquidated damages clause, if the original estimate was a reasonable forecast, the damaged party cannot abandon the clause in favor of actual damages. See, e.g., Monsen Engineering Co. v. Tami-Githens, Inc., 219 N.J.Super. 241, 530 A.2d 313 (1987); X.L.O. Corp. v. John T. Brady & Co., 104 A.D.2d 181, 482 N.Y.S.2d 476 (1984), appeal granted, 110 A.D.2d 1094, 487 N.Y.S.2d 1021(1985), order aff’d, 66 N.Y.2d 970,489 N.E.2d 768,498 N.Y.S.2d 799 (1985)(owner cannot sue contractor for amount of actual damages in excess of liquidated damage amount).

The previous section demonstrated that liquidated damage clauses are not ·enJfor4:eable if shown to be a penalty. If the liquidated damage clause is held to be a penalty, it will not be enforced and actual damages will be the measure of recovery. See, e.g., Larson-Hegstrom & Associates, Inc. v. Jeffries, 145 Ariz. 329, 701 P.2d 587 (App.1985). The party asserting that a liquidated damage clause operates as a penalty has burden of proving what the actual damages are and must show that liquidated damages are not an approximation of that sum. See, e.g., Commercial Union Insurance Co. v. LaVilla Independent School District, 779 S.W.2d 102 (Tex. Civ. App. 1989).

Further, where the owner has contributed to the delay, some courts have refused to enforce the liquidated damages provision and have forced the owner to prove actual damages with the inherent problem of apportioning the delay. See, e.g., Acme Process Equipment Co. v. U.S., 347 F.2d 509, 171 Ct.CI. 324 (1965), rev’d on other grounds, 385 U.S. 138 (l966)(concurrent delay causes government to lose its right to insist on artificial measure of damages applicable to situation where contractor alone delayed project). The ability to apportion concurrent delay, and a court’s willingness to allow apportionment, affects whether a liquidated damages clause will be enforced or whether the owner must show actual damages.

Similar to that in other jurisdictions, California law on apportionment of liquidated damages has followed a tortuous path. In early decisions, California courts refused to apportion delay. Gogo v. Los Angeles County Flood Control District, 45 Cal.App.2d 334, 114 P.2d 65 (Cal. 1941); see also Peter Kiewit Sons’ Co. v. Pasadena City Junior College Dist., 59 Cal. 2d 241, 379 P.2d 18, 28 Cal. Rptr. 714 (l963)(owner responsible for delay was not entitled to liquidated or actual damages). Delay and liquidated damages were, however, apportioned in later California decisions. See, e.g., Nomellini Construction Co. v. Dep’t of Water Resources, 19 Cal.App.3d 240, 96 Cal.Rptr. 682 (3rd Dist. 1971)(where delays in performance of contract are occasioned by mutual fault and extension of time for delay clause in contract, court must apportion delay between parties).

In Vrgora v. L.A. Unified School Dist., 152 Cal.App.3d 1178, 200 Cal.Rptr. 130 (App. 1984), the contractor argued that the liquidated damages clause should not be enforced because the owner had beneficial occupancy of a major portion of the building. The court held that liquidated damages continued to run until the building was fully complete. The court reasoned that because liquidated damages presume the inability of the parties to calculate actual damages, it could not apportion an unknown amount of damages. The result was that although a major portion of the building was occupied by the owner, the full amount of liquidated damages continued to run. See also London Guarantee & Accident Co., Ltd. v. Las Lomitas School Dist., 191 Cal.App.2d 423, 12 Cal.Rptr. 598 (App. 1961)(liquidated damages in public contract run until “actual” completion, not “substantial” completion; architect’s certification of completion conclusive as to date of actual completion) accord Taos Construction Co. v. Penzel Construction Co., Inc., 750 S.W.2d 522 (Mo. 1988)(although traffic was using bridge, where erosion control not completed, liquidated damages continued to accrue); Ledbetter Bros., Inc. v. North Carolina Department of Transportation, 68 N.C.App. 97,314 S.E.2d 761 (1984). Note that Illinois law holds the opposite. See, e.g., Stone v. City of Arcola, 181 Ill.App.3d 513,536 N.E.2d 1329 (1989)(liquidated damages on public projects cease at substantial completion). Federal courts also hold that liquidated damages stop on substantial completion. See, e.g., Appeal of Mitchell Engineering & Construction Co., ENG BCA No. 3785 (April 4, 1989)(liquidated damages cease when project available for its intended purpose).

Finally, some courts have held that liquidated damages cannot be assessed if the contractor abandons the project. See, e.g., City of Elmira v. Larry Walter, Inc., 76 N.Y.2d 45, 564 N.E.2d 655, 563 N.Y.S.2d 45 (1990)(liquidated damages clause operates only to situation where contractor fails to complete on schedule, not to abandonment). Therefore, in the case of abandonment, the owner is entitled to recover actual damages. Other jurisdictions are to the contrary. See, e.g., Pacific Employers Ins. Co. v. City of Berkeley, 158 Cal.App.3d 145, 204 Cal.Rptr. 387 (l984)(performance surety liable for. liquidated damages notwithstanding abandonment by principal).

F. RECOVERABILITY OF DELAY DAMAGES AND LIQUIDATED DAMAGES UNDER PERFORMANCE AND PAYMENT BONDS

The general rule regarding sureties and their principals is that the surety’s liability is coextensive with that of its principal, at least up to the penal sum of the bond. See, e.g., Arbor Club of Boca Raton, Inc. v. Omega Construction Co., 565 So.2d 357 (Fla.App. 1990)review dismissed, Transamerica Ins. Co. v. Arbor Club of Boca Raton, Inc., 576 So.2d 294 (Fla. 1990). Although there is a strong opposite view, the majority rule is that if a default by the principal delays the project, the performance surety can be held-liable for liquidated damages stipulated in the contract. See, e.g., Riva Ridge Apts. v. Robert G. Fisher Co., 745 P.2d 1034 (Colo.App 1987); c.f., American Home Assurance Co. v. Larkin General Hospital, Ltd., 593 So.2d 195 (Fla. 1992)(performance bond required surety to complete project only, not liable for delay damages); Asphalt Paving Co. v. United States Fidelity and Guaranty Co., 671 P.2d 1013 (Colo.App. 1983)(surety liable for actual labor and equipment costs in excess of subcontract balance only).

A surety’s liability for delay damages or liquidated damages is almost certain if the performance bond includes an incorporation clause that places the requirements of the contract on the surety. See, e.g., Pacific Employers Ins. Co. v. City of Berkeley, 158 Cal.App.3d 145, 204 Cal.Rptr. 387 (App. 1984)(although performance bond does not necessarily encompass liability for liquidated damages, if bond incorporates contract which expressly calls for liquidated damages, surety is liable). However, if the owner makes final payment to the contractor, it loses the right to recover liquidated damages against the performance surety. County of Dauphin v. Fidelity and Deposit Co. of Maryland, 770 F.Supp. 248 (M.D.Pa. 1991).

The language of the performance bond on a private project can be determinative of the scope of the bond. See, e.g., Bossier Medical Properties v. Abbott and Williams Construction Co., 557 Sc.2d 1131 (La.App. 1990)(language that surety shall indemnify and hold owner harmless from all costs or damage resulting from principal’s default held to cover lost rent). As to public works performance bonds, however, the statute is often read into the bond and controls its scope. See, e.g., State Highway Administration v. Transamerica Insurance Co., 278 Md. 690, 367 A.2d 509 (1976).

On multiple-prime projects, one contractor may not have any right to make a against another contractor’s performance bond because it is not usually named as an obligee. See, e.g., M.G.M. Construction Corp. v. New Jersey Educational Facilities Authority, 220 N.J.Super. 483, 532 A.2d 764 (N.J.Super. 1987); c.f. Aetna Casualty & Surety Co. v. Doleac Electric Co., 471 So.2d 325 (Miss. 1985)(performance surety can be held liable to other prime contractors due to delay by its principal via third-party beneficiary principles). At least one court has held that a subcontractor could make a claim against a joint venture’s payment bond although it had a contract only with one of the joint venturers. Seaboard Surety Co. v. Richard F. Kline, Inc., 91 Md.App. 236,603 A.2d 1357 (Md.App. 1992).

A subcontractor with a delay damage claim should consider making a claim against the contractor’s payment bond. The Miller Act, 40 U.S.CA. § 270(b), requires the issuance of payment bonds for all federal public projects in excess of $25,000. The purpose of this statutory bond is to protect those who furnish labor and materials on federal jobs. Early decisions under the Miller Act held that delay damages are not recoverable against a Miller Act payment bond. See, e.g., McDaniel v. Ashton-Mardian Co., 357 F.2d 511 (9th Cir. 1966); L.P. Friestedt v. U.S. Fireproofing Co., 125 F.2d 1010 (l0th Cir. 1942); U.S. v. Guy H. Tames Construction Co., 390 F. Supp. 1193 (N.D. Tenn. 1972), aff'd 489 F.2d 756, (6th Cir. 1973); U.S. v. Santa Fe Engineers, 515 F. Supp. 512 (D. Colo. 1981); and W.S.A., Inc. v. Stratton, 680 F. Supp. 375 (S.D. Fla. 1988)(construing Florida’s version of Miller Act).

The district court in the W.S.A., Inc. case gave a good summary of the reasoning behind not allowing damages for delay to be collected from a Miller Act payment bond:

There is no indication of any intention to hold the surety liable for damages caused by delay. The clear language of the payment bond states the surety is liable for only labor, materials and supplies. The same holds true for the statute itself. Because there is no intention in either the statute or this bond in particular, to the contrary, the surety should not be liable for the damages caused by the negligence of the principal in causing the delay. “Labor” and “material” should not encompass damages for breach of contract.

W.S.A., Inc., 680 F. Supp. at 377.

More recently, however, courts are holding that delay damages are recoverable from a Miller Act payment bond. The trend started in the District of Columbia, U.S. ex rel. Otis Elevator Co. v. Piracci Construction Co., Inc., 405 F. Supp. 908 (D. D.C. 1975); U.S. ex rel. Mariana v. Piracci Construction Co., Inc., 405 F. Supp. 904 (D.D.C. 1975); adopted by the Circuit court of the District of Columbia, U.S. v. William S. Klingensmith, Inc., 670 F.2d 1227 (D.C. Cir. 1982); and began to branch out to the other circuits such as in U.S. ex rel. Pertun Construction v. Harvestor’s Group, Inc., 918 F.2d 915 (11th Cir. 1990). These decisions have been based on the broad purpose of the Miller Act which is to be liberally construed and applied. F.D. Rich, Co., Inc. v. U.S. ex rel. Industrial Lumber Co., Inc., 417 U.S. 116 (1974). Further, the language of the Miller Act itself states that the bond is liable for any “sum or sums justly due.” 40 U.S.C. § 270 (B)(a).

The language of the 11th Circuit in the Pertun Construction Co. case summarizes the reasoning of allowing recovery for delay damages:

Surety liability for out-of-pocket costs of delay is consistent with both the language and -the purpose of the Miller Act. The statute provides for recovery of the costs of labor and materials furnished or used by the subcontractor in performing contractual obligations. Only by allowing a full recovery of these costs, including those portions caused by delay, can the purpose of the statute --to afford the subcontractor the financial protection of an action against the surety --be achieved. If the surety is not liable for the portion of costs caused by delay, the subcontractor will either have to bear the burden himself or rely on his remedy for breach of contract against the prime contractor. And it was Congress’s view of the inadequacy of these very alternatives to assure full payment for labor and materials actually supplied to a federal project that prompted the enactment of the Miller Act.

Id. 918 F.2d at 918. See, also, General Federal Construction, Inc. v. D. R. Thomas, Inc., 52 Md.App. 700, 451 A.2d 1250 (1982). Subsequently, the Fifth Circuit Court of Appeals has followed the Eleventh Circuit. U.S. ex rel. Lochridge-Priest, Inc. v. Con-Real Support Group, Inc., 950 F.2d 284 (5th Cir. 1992). In Lochridge, the Fifth Circuit held that the subcontractor can recover if it can show the damages represented the actual increased cost of labor and materials due to the delay.

The Ninth Circuit recently joined the Fifth and Eleventh Circuits in allowing recovery for delay against a Miller Act payment bond. MAI Steel Service, Inc. v. Blake Construction Co., 981 F.2d 414 (9th Or. 1992). The Ninth Circuit distinguished its earlier holding in McDaniel on its facts and held that a subcontractor could recover from the Miller Act surety “all ... increased labor and material costs resulting from construction delays for which it is not responsible, even if those delays are caused by someone other than the general contractor.” MAI Steel, 981 F.2d at 420. Note, however, the court specifically listed the recoverable items - labor and material costs - and did not include indirect delay damages such as increased home office overhead, interest on retention, claimed lost profits, etc. See also U.S. ex rel. T.M.S. Mechanical Contractors, Inc. v. Miller Mutual Fire Ins. Co. of Texas, 942 F.2d 946 (5th Cir. 1991)(payment bond not liable for termination for convenience costs).

Other courts distinguish delay damages and damages stemming from the general contractor’s breach of contract. In U.S. ex rel. Moran Towing Corp, v. Hartford Accident & Indemnity Co., 204 F. Supp. 353 (D.R.I. 1962), the district court stated:

It is generally held that bonds furnished under the Miller Act are to be liberally construed . . . In accordance with this rule, the courts have construed said Act liberally to allow recovery upon bonds provided thereunder . . . . But despite this liberal construction, it is generally held that a subcontractor has no remedy against the surety on a Miller Act bond for the recovery of damages caused by the negligence of the prime contractor, the principal on such bond. . . . Similarly, while a subcontractor may undoubtedly maintain an action against the prime contractor for loss of profits caused by the latter’s breach of contract, the courts hold that he may not maintain such an action against a surety on the prime contractor’s bond furnished under the Miller Act ....

However, there is a distinction between a claim for the value of labor and materials furnished by a subcontractor in the prosecution of the work as a result of the breach or default in the performance of his contract by the prime contractor, and a claim for damages for the breach of such a contract. Where the claim asserted is for the value of labor and materials furnished, the subcontractor may maintain an action against the surety on such a bond.

Id. at 355-356.

It has been argued that because state public works payment bonds guarantee “payment,” not performance, and are a substitute for the state’s mechanic’s lien laws, the payment bond surety should not be liable for full performance of every subcontract obligation but only for labor and materials provided to the project. To the extent that a subcontractor wishes to recover delay damages on a state public works payment bond, the language of the statute often plays a key role. See, e.g., Salvino Steel & Iron Works, Inc. v. Fletcher & Sons, Inc., 398 Pa.Super. 86,580 A.2d 853 (Pa.Super. 1990)(statutory language covered materials furnished or labor performed, not storage costs due to delay of prime). The scope of a statutory payment bond is measured by the statute under which it is issued. See, e.g., Wichita Sheet Metal Supply, Inc. v. Dahlstrom & Ferrel Construction Co., 246 Kan. 557, Ms.792 P.2d 1043 (1990)(statute read into the bond; missing provisions included and restrictive provisions that conflict with the statute are read out). At least one state has allowed a subcontractor to recover delay damages against a statutory payment bond. See, e.g., General Federal Construction, Inc. v. D.R. Thomas, Inc., 52 451 A.2d 1250 (Md.App. 1982)(Maryland’s Little Miller Act payment bond construed similar to federal Miller Act bond; recovery for delay damages allowed).

In conclusion, the authors suggest that owners, contractors, subcontractors, design professionals and all others involved with the construction process should be prepared for delay claims which will inevitably arise. In today’s construction industry, even the smallest mistakes’ can ripple into big delays in project completion. The axiom “time is money” is particularly true in construction --delay is costly and ultimately someone must bear that cost. Hopefully, this paper has shed some light on the nature and extent of damages that are recoverable when a construction project is delayed. u