Beware of No-Damages-for-Delay Clauses

IMG_0284It has been several months since I last published a blog entry.   My term as the President of the Scottsdale Bar Association and a particularly busy period in my practice have recently left too few hours in the day for blogging.  But now that my term has ended, I intend on resuming my regular posts.  In light of my time away, I thought it only fitting that this post cover some aspect of delay.  I will, therefore, address in this post the often controversial “no-damages-for-delay” clause.

The law, consistent with typical notions of fairness, generally allows contractors to recover monetary damages arising out of delays caused by the project owner (or the general contractor if the damaged party is a subcontractor).  Owners and general contractors are, however, seeking to avoid these types of damages with increasing regularity by adding no-damages-for-delay clauses to their respective contracts and subcontracts.  These clauses (which can come in all different shapes and sizes) typically attempt to eliminate or curtail a contractor’s right to recover monetary damages stemming from all or certain types of delays caused by the “upstream” party or parties on a project.  Given the potentially severe financial impact these provisions can have on the parties who are asked to accept them, they should be fully understood and carefully considered before signing a contract.

The Enforceability of No-Damages-For-Delay Clauses Generally.

While the enforceability of no-damages-for-delay clauses is entirely dependent on the state law governing the contract, they are, as a general rule, enforced in most jurisdictions if the language of the clause is clear and unambiguous.  Maurice T. Brunner, Validity and Construction of “No Damage” Clause with Respect to Delay in Building or Construction Contract, 74 A.L.R. 3d 187 at § 3 (1976).  This general rule is grounded in the public policy that contracts between sophisticated parties should be enforced as drafted.  See Green Intern., Inc. v. Solis, 951 S.W.2d 384, 387 (Tex. 1997).  Yet this rule is not without its exceptions.  Some states have legislatively barred or restricted the use of no-damages-for-delay clauses, and others have created common law exceptions to their enforceability.

For instance, in some jurisdictions where no-damages-for-delay clauses are generally enforced, the clause will not preclude a contractor’s right to recover for: “(1) delays caused by the contractee’s bad faith or its willful, malicious or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of  a fundamental obligation of the contract.”  Corinno Civetta Construction Corp. v. City of New York, 493 N.E.2d 905, 909-10 (N.Y. 1986).  Similarly, in other jurisdictions “a contractor may recover for unreasonable delays in the construction process notwithstanding the presence of ‘no damage’ clauses, if the delay: (1) was of a kind not contemplated by the parties, (2) amounted to an abandonment of the contract, (3) was caused by bad faith, or (4) was caused by active interference.” Peter Kiewit Sons’ Co. v. Iowa S. Utilities Co., 355 F. Supp. 376, 397 (S.D. Iowa 1973).

The Enforceability of No-Damages-For-Delay Clauses in Arizona.

In Arizona, the enforceability of no-damages-for-delay provisions appears to hinge on whether the subject contract pertains to a public or private project.  As an initial matter, the Arizona Legislature has rendered these clauses unenforceable in prime contracts relating to public projects.  Specifically, A.R.S. §§ 34-221(F) and 41-2617 provide that public construction contracts:

shall include a provision that provides for negotiations between the agent and the contractor for the recovery of damages related to expenses incurred by the contractor for a delay for which the agent is responsible, which is unreasonable under the circumstances and which was not within the contemplation of the parties to the contract. This section shall not be construed to void any provision in the contract that requires notice of delays or provides for arbitration or other procedure for settlement or provides for liquidated damages.  (Emphasis added).

In fact, A.R.S. § 34-221(F) was directly at issue in Technology Const., Inc. v. City of Kingman, 229 Ariz. 564 (App. 2012), which is the first and only Arizona case interpreting a no-damage-for-delay clause in a construction contract.  In Technology Const., the City of Kingman argued that the following clause insulated the City from liability for its delays in connection with a railroad crossing improvement district:

IT IS EXPRESSLY UNDERSTOOD AND AGREED by the parties to this agreement, that in no case (except where it is otherwise provided for in Arizona Revised Statutes, §§ 48-571 to 8-619 inclusive) will the City or any officer thereof, be liable for any portion of the expenses of the work aforesaid, nor for any delinquency persons owning property assessed, nor for the failure of the City to sell its improvement bonds to finance this contract.

229 Ariz. at 567 (emphasis in original).  But the Arizona Court of Appeals rejected this argument.  Instead, the Court of Appeals affirmed the trial court’s decision that the City was liable for the delays it caused pursuant to A.R.S. § 34-221(F) and Section 109.8 of the MAG Specs (which incorporated § 34-221(F)), regardless of the “no liability” provision in the parties’ contract.  Id. at 567, 569.

Arizona’s legislative ban on no-damages-for-delay clauses does not extend to contracts relating to private construction projects.  There are also no Arizona cases interpreting the enforceability of these clauses in a private setting.  Arizona law does, however, place a premium on upholding parties’ freedom to contract.  See 1800 Ocotillo, LLC v. WLB Grp., Inc., 219 Ariz. 200, 202 (2008) (holding “[o]ur law generally presumes, especially in commercial contexts, that private parties are best able to determine if particular contractual terms serve their interests…[s]ociety also broadly benefits from the prospect that bargains struck between competent parties will be enforced” (internal citations omitted)).  In fact, it is well-established that “absent legislation specifying that a contractual term is unenforceable, courts should rely on public policy to displace the private ordering of relationships only when the term is contrary to an otherwise identifiable public policy that clearly outweighs any interests in the term’s enforcement.” Id.  

Accordingly, and consistent with the prevailing rule in most jurisdictions, no-damages-for-delay clauses in private construction contracts are likely generally enforceable in Arizona.  But in evaluating such provisions, it stands to reason that Arizona courts would look at the various exceptions developed in other jurisdictions for guidance.

In sum, no-damages-for-delay clauses shift the risk of financial liability for delays caused by the contractee (i.e., the owner or general contractor) to the contractor (or subcontractor, as the case may be).  Moreover, while unenforceable in connection with Arizona public prime contracts, these provisions are likely enforceable in Arizona in contracts pertaining to private projects.  It is, therefore, critical for contractors and subcontractors to identify and carefully consider these provisions before signing a contract.  Failure to do so could be financially disastrous.