Stay on Course in the Changing World of Claim Preclusion Clauses

Vol. 14 No. 1

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Negotiating, drafting and enforcing claim preclusion clauses can quickly land even an experienced construction practitioner in foreign territory. From notice requirements to “no damage for delay” clauses, the application of claim preclusion clauses varies wildly in content and enforcement from jurisdiction to jurisdiction. This article examines the judicial treatment of claim preclusion clauses, focusing on claim notice requirements and “no damage for delay” clauses, and sets a framework for drafting and negotiating such clauses.

Overview of Notice Requirements
When a contractor encounters delays on a project, the axiomatic response (at least from the construction practitioner’s perspective) should be to check the contractual claim notice requirements to identify what notice must be submitted, to whom and when. Too often, however, the notice provisions are ignored or glossed over by the affected contractor. What happens if the contractor fails to furnish the required notice, or is late in doing so? How will its noncompliance be viewed by a court? The answer largely depends on the jurisdiction as courts generally enlist two approaches to noncompliance: (i) strict compliance; or (ii) an equitable actual knowledge/no prejudice approach. The approach selected by a particular jurisdiction will not only drive the outcome in a claim or litigation scenario in which the sufficiency of the notice is disputed, but more importantly should factor heavily into the negotiating and business decisions of the parties when addressing notice requirements at the drafting stage. A proactive approach to dealing with notice provisions is an easy, but overlooked, area in which a practitioner can save his or her client significant time and money on the project.

Strict Compliance Approach: In strict compliance jurisdictions, a contractor’s failure to meet the express contractual notice requirements may very well forfeit its entitlement to additional time and/or costs for delay. In these jurisdictions, even substantial compliance with express notice provisions (almost always asserted as a defense to claim preclusion) and/or the owner’s actual knowledge of the delay may not preserve the claim. See e.g. Razorback Contractors of Kansas, Inc. v. The Bd. of Co. Comm. of Johnson Co., Kansas, 227 P.3d 29 (Kan. 2010) (claim barred despite the owner’s/general contractor’s actual knowledge of the claim events and where the owner had given more time for the same delay events); Starks Mech., Inc. v. New Albany-Floyd County Consol. School Corp., 854 N.E.2d 936 (Ind. App. 2006) (claim barred despite the claimant’s timely, ongoing submission of RFI’s identifying the problem and impact to the work, and the owner’s actual knowledge of the delay and consent to the remedial design work).

Further, even verbal notice of a claim and/or written notice of a possible claim have been found insufficient. See Razorback, ­227 P.3d 29; American Nat’l Electric Corp. v. Poythress Commercial Contractors, Inc., 604 S.E.2d 315(N.C. 2004). Some courts have cited the purpose of notice provisions, invoking concepts of fairness to distinguish between notice of cost impacts and notice that a claimant is expressly seeking payment of those cost impacts from the general contractor or owner. See Associated Mech. Contractors v. Martin K. Eby Constr. Co., 271 F.3d 1309 (11th Cir. (Ga.) 2001). In light of the above, the construction practitioner operating in a strict compliance state must be aware (both at the drafting and claim stage) of the layers of notice required, the timing components and the content requirements for notice set forth in the contract because a reviewing court may well enforce those requirements to the letter.

Actual Knowledge/No Prejudice Approach: Other jurisdictions approach the issue of noncompliance in equitable terms — did the owner or general contractor have actual knowledge of the claim? Were they prejudiced by the lack of notice? In equitable approach jurisdictions, a contractor’s failure to meet the express contractual notice requirements will only forfeit its entitlement to additional time and costs if the owner can demonstrate the lack of actual knowledge and that it is prejudiced by the noncompliance. See e.g. James Corp. v. North Allegheny School Dist., 938 A.2d 474 (Pa. Commw. Ct. 2007); Mingus Constructors, Inc. v. U.S., 812 F.2d 1387 (Fed. Cir. 1987).

Overview of Enforceability of “no damage for delay” Clauses
No damage for delay (NDD) clauses generally restrict a contractor’s right to recover for otherwise compensable delay to an extension of time only. Historically, NDD clauses have been strictly construed based on the common law’s aversion to harsh forfeiture provisions. Reflecting this approach, some states have enacted legislation voiding or limiting NDD clauses.

Other states find that the NDD clause is necessary to protect the public interest in fixing the cost of public works contracts. In these jurisdictions, courts generally reason that NDD clauses are necessary to protect public agencies with fixed appropriations or loan commitments against litigation based on claims that the public agency has been responsible for unreasonable delays. See Board of Education of Worcester County v. BEKA Industries, Inc., 190 Md.App. 668, 732-33, 989 A.2d 1181, 1219 (2010). These courts negate forfeiture concerns reasoning that contractors involved in large complex construction projects are sophisticated enough to recognize the impact of the NDD clause and adjust the contract price upward to compensate for the risk. See Wells Bros of New York v. U.S., 254 U.S. 83, 41 S.Ct. 34, 65 L.Ed. 148 (1920).

Judicial exceptions to enforceability of the NDD clause arise from implied contractual obligations such as (1) the obligation of good faith and fair dealing, (2) the obligation of cooperating and (3) the obligation of non-interference. The judicial exceptions generally, include:

Uncontemplated Delays. This exception is based on the concept of mutual assent. Courts upholding this exception for uncontemplated delays find that even though the law assumes mutual consent to contract terms, the law will not assume that a contractor bargained away his right to bring a claim for damages resulting from delays that were not within the contemplation of the parties at the time of contract execution. See Corinno Civetta Constr. Corp. v. City Of New York, 67 N.Y.2d 297, 493 N.E.2d 905, 502 N.Y.S.2d 681 (1986). Recent decisions, however, have eroded this exception reasoning that mutual assent does not require the parties to foresee all potential project delays. These jurisdictions find that one of the purposes of the NDD clause is to address unforeseen delay, and to include a price adjusted for this risk. See Markwed Excavating, Inc. v. Mandan, 791 N.W.2d 22, 28 (N.D. 2010) (citing John E. Gregory & Son, Inc. v. A Guenther & Sons, Co., 147 Wis.2d 298, 432 N.W.2d 584, 587 (1988)).

Intentional abandonment. Based on the concept that a broad NDD clause includes reasonable and unreasonable delays, this exception requires that a delayed contractor establish that the contractee is responsible for delays which are so unreasonable that the delays constitute relinquishment of the contract with the intention of never resuming it. Corinno Civetta, 67 N.Y.2d at 312, 493 N.E.2d at 912, 502 N.Y.S.2d at 688.

Active Interference/bad faith. Active interference arises from an implied obligation by the contractee to refrain from doing anything that would unreasonably interfere with the delayed contractor’s opportunity to proceed with reasonable economy and dispatch. As the name implies, active interference requires a finding that a defending contractee committed some affirmative, willful act in bad faith which unreasonably interfered with the contractor’s compliance with the contract. See, Law Company, Inc. v. Mohawk Constr. and Supply Co., Inc., 702 F.Supp.2d 1304, 1326 (D. Kan. 2010). This exception does not extend to delays resulting from a contractee’s mere inept administration, (see T.J.D. Constr. Co. v. City of New York. 295 A.D.2d 180 (2002)), or from a contractee’s negligent misrepresentation (see Markwed Excavating, 791 N.W.2d at 32).

Unconscionability. An NDD clause is unconscionable if it is one no rational, undeluded person would make, and no honest and fair person would accept, or if it is blatantly unfair. This is a fact specific determination, on a case-by-case basis. An NDD clause is not unconscionable if a sophisticated contractor on a competitively bid project could have protected itself against delays through a bid adjustment to its work. Markwed Excavating, 791 N.W.2d at 31.

Fundamental Breach. Fundamental breach is a very narrow exception which requires a showing of complete frustration of the performance of one of the parties, not merely a delay in time. Law Company, 702 F.Supp.2d at 1321 (citing Mafco Elec. Contractors v. Turner Constr., No 07-000114, 2009 WL 807469 (D.Conn. March 26, 2009). A contractor’s burden of proving this exception is a strong one. Typical cases for the fundamental breach exception include where the owner has failed in its obligation to obtain title to the work site or to otherwise make the site available to the contractor. Manshul Constr. v. Board of Educ. 160 A.D.2d 643, 559 N.Y.S.2d 260, 261 (1st Dep’t 1990).

Practical Application
The contract drafting stage provides a prime opportunity to manuscript limitations on recovery. These limitations take many forms – not only notice provisions and specific damage limitation clauses, but also clauses which establish governing law, the location and jurisdiction of any dispute. All of these clauses should be deliberately considered and drafted based on an understanding of the goals of the agreement, the goals and ability of the client, and the needs of the project.

Determine potential risks. One cannot allocate risks without first gaining an understanding of what the potential categories of risk are for a particular project. Many of these are common categories – such as weather related delays, force majeure events, risk associated with design errors, unforeseen or hidden conditions, and government actions. Each project may also have specific risks. These may include items such as the inability to grant time extensions, the potential for consequential damages, limited site access, strenuous financing or other third party requirements, and cash flow limitations. The potential risks can also be created by the nature of the parties involved – financial ability, experience, competition, and standard practices all playing a potential role – and the nature of the work itself. There may be specific types of monetary (or non-monetary) risks that need to be considered – including the ability to price those risks. There may also be risks created by other agreements relating to the same project.

Determine appropriate reactions. With knowledge of the types of risks out there, determine what the appropriate reactions to risk should be. This involves, among others, determining the timing and extent of notice, whether there should be an opportunity to inspect certain conditions before they are disturbed, and responsibility for tracking and determining losses (in both time and money). Establish clear communication protocols, identifying (a) who receives or is authorized to provide information or direction, (b) what information or direction should be provided, (c) when is it due, and (d) how should it be communicated (i.e., verbal, email, serial correspondence, etc.). It may be necessary to identify layers of reaction – for example, notice of a condition within a certain time frame followed by the opportunity to inspect for a certain time frame.

Determine default allocation of risk. Understand the default allocation of risk in the jurisdiction governing the contract. Legally, risk may be allocated by statute, by regulation, and by case law, in addition to by contract. Different jurisdictions have different default rules. These rules may establish liability for certain acts, may govern the enforceability or effect of certain clauses, and may limit liability. In addition, determine what may be changed from the default rule. For example, there may be legal restrictions on claim preclusion clauses or indemnity provisions, and certain waivers may be unenforceable as void against public policy. Understanding what can be done assists in determining the goal of any restrictive clauses – i.e., transfer, restriction, limitation, or definition.

Draft any revisions to default allocations of risk. With an understanding of the law and the specific risks, deliberately draft clauses that are meaningful and enforceable. Focus on clauses that accomplish the underlying goals. To strengthen claim preclusion clauses, consider tightening the time lines for notices, expanding requisite notice contents, and implementing multiple notice requirements for the triggering event and when the claim is quantifiable. One may wish to separately address the treatment of ongoing delays, and expressly include waiver terms for noncompliance. Additionally, general contractors or at-risk construction managers should flow-down or otherwise specifically address any upstream notice requirements, and include shorter lower tier notice deadlines than those owed to the owner to preserve the ability to evaluate the validity of the claim and pass it on to the owner or architect within the notice period.

Define delays. To qualify as a delaying event, what parameters must be met – i.e., should there be a critical path analysis? Consider the effect of substantial completion, final completion, and any interim milestones – and to which of these events the proof of delay should tie. Identify ownership of any float, and the ramifications of early completion. To limit NDD clauses, consider narrowly defining the delay for which compensation is barred, and specifically limiting NDD clauses to circumstances outside the client’s control.

Define damages. If damages are difficult to price, consider whether they are mechanisms of agreeing to pricing or agreeing to a methodology of pricing that narrows the focus of any dispute. Agreed pricing can benefit both the claimant and respondent by providing certainty and avoiding costs in the event of a dispute. This may be done in many ways, including through liquidated damage provisions, unit price agreements, and establishment of force account rates. To limit NDD clauses, narrowly define delay damages to exclude claims for disruption, acceleration and changed conditions.

Define a method for resolving disputes. There are many methods of dispute resolution available – dispute review boards, mediation, arbitration, and litigation being just a few. Determine which makes most sense for the project and the client. This may include considerations of favorable (or not) jurisdictions, the ability to pay a decision maker, the potential for 3rd party claims, the accessibility of the project site, and the location of the parties, witnesses, and documents.

The time to manuscript limitations on claim preclusion clauses is during contract drafting. By combining both an understanding of the discreet subsets of law dealing with a particular claim preclusion clause, such as notice provisions or “no damage for delay” clauses, with a holistic approach to risk allocation during drafting and negotiation, the construction practitioner can better serve and protect the client’s needs.


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