Last week’s blog posts discussed “No Damages for Delay” (“NDD”) clauses (See September 14 blog post and September 15 blog post), which are contract provisions that shift the financial risk of any project delay to the contractor by granting the contractor only a time extension, not monetary damages, if delays are encountered. Fortunately, in Washington contracts and Oregon public contracts (Alaska, you folks need to catch up) these NDD clauses are against public policy. What follows is an example of a jurisdiction in which no legislative action has been taken to protect contractors from these types of one-sided risk shifting processes.
In Markwed Excavating, Inc. v. City of Mandan (2010), the North Dakota Supreme Court addressed the question of whether a NDD clause should be enforced. Markwed Excavating, Inc. (“Markwed”) was the utility contractor on a City of Mandan (“City”) storm sewer project. The contract duration was supposed to be 9 months, requiring the contractor to complete the work by May 1, 2007. The contract contained the following NDD clause:
“The [c]ontractor will not be entitled to any compensation for causes resulting in delays or hindrances to the work. Extensions of time will be granted for unavoidable delays, which in the opinion of the [e]ngineer are clearly beyond the control of the [c]ontractor, resulting from causes such as Acts of Providence, fortuitous events, and the like. The [e]ngineer must receive written notice of claim for such delays from the [c]ontractor before any extensions of time will be granted.”
During the course of the project Markwed was unable to utilize the anticipated staging area (which was set forth in the contract documents) because the City had not fulfilled its obligation to obtain temporary construction easements. The inability to access the staging area delayed the project for several weeks. Markwed claimed it was unable to perform any significant work on the project in 2006. Markwed was granted a time extension, however, the contractor brought suit against the City, seeking approximately $400,000 in delay damages. Markwed asserted it incurred the delay and financial damage because the City breached the contract by failing to obtain the easements which would have allowed Markwed to use the staging area in a timely manner. The City rejected the claim based on the NDD clause and Markwed sued the City.
At the district court level (trial court) Markwed argued that the NDD clause was ambiguous and unconscionable. The trial court disagreed. Markwed recovered nothing at trial from the City. Markwed appealed to the North Dakota Supreme Court. Markwed’s position was (1) the NDD clause was ambiguous because it did not address “uncontemplated” delays (akin to “unreasonable” delays); (2) the clause was “repugnant” in that it condoned the City’s failure to obtain easements contrary to the “time is of the essence” clause in the contract; and (3) the NDD was “so one sided it would be unjust and unfair to enforce it.”
The Supreme Court of North Dakota disagreed holding that the NDD clauses protect public entities contracting for improvements on the basis of fixed appropriations. In other words, if the contractor wanted to protect itself from the enforceability of an NDD clause, it should have put a contingency in its bid price. It is difficult to follow this reasoning, particularly in the current construction market place; a prudent contractor would likely not increase its bid for unknown contingencies such as the owner’s potential failure to obtain the easements necessary for a staging area. Instead, the North Dakota supreme court rejected the New York judicially created exception to the enforceability of an NDD clause, which is “delays not within the contemplation of the parties.”
While I have complained bitterly about the law in Washington concerning written notice and the fact that a contractor’s claim can be forfeited even if the owner suffers no prejudice as a result of the late notice. Washington contractors are fortunate that years ago the legislature recognized the unfairness of placing NDD clauses in construction contracts, and the consequent cost, in the long run, to the taxpayers when the contractor is faced with the choice of not bidding the project or placing a contingency in its bid, ultimately costs the taxpayers.
There are two other arguments employed to get around a NDD clause that were not discussed in the previous two posts; they are the “Cardinal Change” or the “First Breach” legal theories.
- Cardinal Change: Under the Cardinal Change theory the contractor’s argue that drastic modifications have fundamentally altered the scope of the contract such that the contractor is entitled to damages. The change is so significant and substantial that it amounts to an abandonment of the contract, and therefore, the NDD clause is no longer enforceable. The standard of proof for a Cardinal Change is a difficult on to meet.
- First Breach Theory: Another argument around the NDD clause is to take the position the owner breached another material provision of the contract and therefore, the owner cannot rely on the exculpatory NDD clause because the owner breached the contract. In this instance, Markwed’s argument that the City’s failure to obtain the easements necessary for the staging area was a material breach of the “time is of the essence clause,” was rejected by the court.