In complex construction projects, delays are often the norm – so much so that contractors and subcontractors alike have come to expect them. In order to eliminate some of the risks associated with delays, including potentially large claims for damages, owners, developers, and contractors favor including no damages for delay clauses in their contracts. These clauses preclude contractors or subcontractors from claiming damages for their losses due to delays. Reliance on such powerful contractual clauses usually results in significant protections for parties facing delay claims.
NDD clauses are enforced in most jurisdictions, as the federal courts detail in the recent decisions of NASDI LLC v. Skanska Koch Inc. Kiewit Infrastructure Co. (JV) and Northeast Illinois Regional Commuter Railroad Corp. v. Judlau Contracting Inc. However, there are exceptions to the enforcement of NDD clauses, ranging from delays caused by bad faith or malice to delays resulting from the breach of fundamental contractual obligations.
Further reading:
- Do no damages for delay clauses cover acceleration costs?
- When ‘putting it in writing’ isn’t enough
- Expanding liability for design professionals: The hits just keep coming
While these exceptions have been recognized, parties seeking application of these exceptions are rarely successful – something both of the above cases also opine upon. Thus, before entering into a contract, it is critical for parties to evaluate how NDD clauses can impact their ability to recover.
Even parties on federal projects, where the Miller Act is at play, are subject to NDD clauses. In fact, the recent decision of United States of America f/u/b/o McCorvey Sheet Metal Works L.P. v. Travelers Casualty and Surety Company of America, et al. highlighted that sureties may also rely upon and invoke NDD clauses.
Enforcing NDD clauses
In NASDI LLC v. Skanska Koch Inc. Kiewit Infrastructure Co. (JV), the U.S. Court of Appeals for the 2nd Circuit affirmed the district court’s grant of summary judgment dismissing a subcontractor’s delay claim against a general contractor on a public project in New York state. The parties’ dispute stemmed from demolition work that NASDI subcontracted to complete for SKK after the Port Authority of New York and New Jersey selected SKK as the general contractor to reconstruct the Bayonne Bridge.
The subcontract contained an NDD clause. Faced with schedule delays that were projected to span 19 months, NASDI sent SKK a notice of termination, asserting that SKK had “abandoned” the subcontract due to such delays. SKK declared NASDI to be in default and hired a replacement demolition firm to complete the work, costing SKK $24 million. NASDI filed this action asserting claims for breach of contract, among other claims. SKK moved for summary judgment on all claims, which the district court granted. This appeal followed.
The district court held that NASDI’s breach of contract claim was barred by the subcontract’s NDD clause. Such clauses, which prevent a plaintiff from suing a defendant over delays that occur while performing on a contract, are generally valid and enforceable in New York. While New York law recognizes several exceptions under which a plaintiff can sue a defendant for delay, plaintiffs face a “heavy burden” in seeking to invoke them. NASDI maintained that two exceptions should apply.
First, NASDI argued that the clause was unenforceable because the 19-month delay was uncontemplated. New York courts, along with many other jurisdictions, have recognized that lengthy delays are generally foreseeable, not uncontemplated, in complex construction projects. Therefore, this exception was inapplicable.
Second, NASDI argued that the NDD clause was unenforceable because the delays were “so unreasonable that they constituted an intentional abandonment” of the subcontract by SKK. The court disagreed, finding that the length of the delays alone was insufficient to make them unreasonable, given that New York courts have upheld NDD clauses against delays of greater length in similar contexts. NASDI’s arguments were ultimately not strong enough to overcome enforcement of the NDD.
New York law is certainly in line with the majority of jurisdictions in finding that NDD clauses are generally valid and enforceable and any such exception may only be satisfied via clearing a high bar. In fact, the U.S. District Court for the Northern District of Illinois recently confirmed a similar explanation of the law in the case of Northeast Illinois Regional Commuter Railroad Corp. v. Judlau Contracting Inc.
Northeast, a public corporation that owned and operated commuter rail service, filed suit against Judlau, a contractor, claiming breach of contract due to Judlau failing to complete the construction project until over two years after the completion date. Judlau filed a counterclaim against Northeast for breach of contract. The parties cross-moved for partial summary judgment on issues solely related to damages, arguing that the NDD clause prevented Judlau from damages caused by project delays.
Judlau argued that an unavoidable delay arose out of the Existing Facility Protection review process. The court explained that NDD clauses are generally enforceable in Illinois. While Illinois courts also recognize exceptions to such clauses, those are applied sparingly in cases of delay caused by bad faith, delay not within the parties’ contemplation at the time of execution, delay of “unreasonable duration,” and delay attributable to “inexcusable ignorance or incompetence of engineer.”
Judlau contended that Northeast’s delays in the EFP process were not covered by the NDD clause because they were outside the contemplation of the parties. The court disagreed that the parties did not contemplate delays in the permitting process, pointing out that the contract itself establishes that the sophisticated parties knew the project required a multifaceted permitting process involving state and municipal authorities. Therefore, this exception did not apply to Judlau’s argument.
Next, Judlau argued that Northeast’s delays in initiating the EFP process and lack of engagement therein were of an unreasonable duration. The court held that the length of delay does not by itself establish unreasonableness and that Judlau did not further support this argument, and therefore it failed. Finally, Judlau contended that Northeast intentionally hindered the EFP review process in bad faith, excusing the resulting delays from the NDD clause. The court found that this, too, lacked an adequate evidentiary showing, as the bar to show a bad faith delay is high.
In both cases above, the court declined to extend narrow judicially created exceptions to the NDD clause, reinforcing the idea that these provisions provide significant protection against delay claims and exceptions to them are seemingly rarely successful.
Miller Act does not bar sureties from invoking NDD clauses
Taking a slightly different spin on the enforcement of NDD clauses, the U.S. District Court for the District of Maryland looked at how such a clause was enforced in the context of a Miller Act dispute.
In United States of America f/u/b/o McCorvey Sheet Metal Works L.P. v. Travelers Casualty and Surety Company of America, et al., the court granted the motion of cross-claimant Clark Construction Group LLC to dismiss the counterclaim of cross-claim defendant Kirlin Design Build LLC. Kirlin then filed a similar counterclaim against the sureties. The sureties moved to dismiss Kirlin’s counterclaim.
The United States contracted with Clark for the design and construction of a building at Fort Meade in Maryland. The Miller Act required Clark, as the prime contractor on a federal project of this scale, to execute a payment bond to the United States to guarantee that the subcontractors and suppliers would get paid. Clark executed a first-tier subcontract with Kirlin.
Kirlin sought compensation from the sureties for the costs it said it incurred as a result of Clark’s delays. Like Clark, the sureties contended that the subcontract contained an NDD clause, pursuant to which Clark had no obligation to compensate Kirlin for these costs. The court held that the sureties could enforce this NDD against Kirlin in this Miller Act counterclaim.
While NDD clauses are generally enforceable under Maryland law, whether they are enforceable under the Miller Act is a question of federal law. Federal courts, specifically the 9th Circuit, have previously held that a “surety can only enforce contract terms to limit its Miller Act liability if those terms are consistent with the Act.”
The clause in the subcontract between Kirlin and Clark entitles Kirlin to “compensation for compliance with schedule amendments or damages for delay only to the extent the Contract Documents entitle Clark to damages from the (United States) or other third parties.” Thus, the subcontract imposed a duty on Clark to cover only Kirlin’s expenses arising from amendments to the schedule or other delays to the extent that the prime contract imposed a duty on the United States or a third party to cover Clark’s same costs.
There are two circumstances the court reflected on (from older case precedent), in which NDD clauses were found unenforceable because 1) they conflicted with the Miller Act’s guarantee that subcontractors may sue for payment 90 days after the completion of work and 2) they thwarted the Miller Act’s purpose of ensuring subcontractors get paid for their work even if the United States does not pay the contractor. However, these two considerations did not cut against the enforceability of the NDD clause in this case, as the clause was compatible with the Miller Act. Furthermore, the court held there was no authority to support the argument that the Miller Act bars sureties from invoking the NDD clause.
Accordingly, the court held that the NDD clause in the subcontract was enforceable.
Takeaways
NDD clauses strive to protect parties against contractor claims for losses resulting from party-controlled delays. While courts have held that these clauses are generally enforceable, there are a few recognized exceptions, including but not limited to: the delays were uncontemplated, the delays were so unreasonable that they constituted an intentional abandonment of the contract, the delays were caused by bad faith, and the delays were of unreasonable durations. While these are legitimate exceptions recognized by the courts, these exceptions are very narrowly construed and consequently more difficult to prevail on the application thereof. In other words, courts have proved reluctant to uphold exceptions to NDD clauses, except in more egregious circumstances.
Even in Miller Act cases, the clauses can be enforced. While there are exceptions to their enforcement if they conflict with the Miller Act’s fundamental principles and purpose, it is not difficult for sureties to argue the compatibility of such clauses with the Miller Act.
The fact that a contract includes an NDD provision does not mean it will automatically be enforced in a court of law. But parties should assume any applicable exceptions will be applied sparingly by the courts. It is therefore critical for contractors and subcontractors to carefully mull over these provisions before signing contracts.
