In Part I of this post pertaining to “no damages for delay” clauses in construction contracts, we provided examples of the “no damages for delay” clauses and statutory provisions in Washington and Oregon, which preclude “no damages for delay” clauses in construction contracts (Oregon statute is limited to public contracts). This post will address a recent case that interpreted the “no damages for delay” statute in Washington and we will explore ways of getting around a “no damages for delay” provision in a construction contract.
1. Scoccolo Construction, Inc. v. City of Renton.
In Scoccolo Construction, Inc. v. City of Renton, the Washington Supreme Court reversed a decision of the court of appeals and ruled that a construction contractor on a public works project for the City of Renton, who was delayed by a utility, could recover delay damages from the City of Renton. The court found that RCW 4.24.360, which prohibits contractual provisions barring the recovery of delay damages (“no damage for delay” provision), applied, invalidating a contract clause that would have barred Scoccolo’s recovery.
The City of Renton entered into a contract with Scoccolo Construction Company (“Scoccolo”) to widen one of its streets. Part of the project involved the removal and relocation of utility poles by Puget Sound Power and Light, U.S. West, and TCI Cable (the “utilities”). The construction contract contained a provision which required Scoccolo to coordinate the relocation efforts with the utilities. Renton’s contract also contained the following “teflon” (“no pay for delay”) clause:
“No additional compensation will be made to the contractor for reason of delay caused by acts or any utility company, and the contractor shall consider such costs to be incidental to the other items of the contract.”
The City had, prior to contracting with Scoccolo, entered into franchise agreements with the utilities authorizing the City, in conjunction with public construction project, to compel the utilities to relocate their utilities at the utilities’ cost and expense. During the course of performing the project, Scoccolo was delayed by the failure of the utilities to complete the removal and relocation work in a timely manner. Scoccolo filed suit seeking damages from Renton.
RCW 4.24.360 provides that any contract which purports to waive the rights of a contractor to an equitable adjustment arising out of unreasonable delay which is caused by the owner or “persons acting for the [owner]” is against public policy and unenforceable. Scoccolo, relying on the statute, prevailed at the trial court level. The trial judge reasoned that since Renton had franchise agreements with its utilities, the utilities were acting for Renton, the statute rendered void the contractual bar to recovery, and that Scoccolo was entitled to an award of delay damages. The jury awarded Scoccolo significant delay damages.
The court of appeals reversed in part, holding that the utilities did not “act for the City” and thus RCW 4.24.360 did not apply. However, the supreme court, reversing the court of appeals, reasoned that since the franchise agreement between the City and the utilities permitted the City to compel the utilities to relocate their facilities at their own expense, Puget and TCI were indistinguishable from any other contractor the City might have hired. Thus, the utilities should be considered as “acting for” the City, and RCW 4.24.360 applied. The court reinstated the full jury verdict.
Washington precedent is clear that under the “economic loss rule,” a contractor cannot recover economic damages from an entity with which it has no privity of contract. Since Scoccolo had no contract with any of the Utilities (its contract was with Renton), Scoccolo was foreclosed from any cause of action against the Utilities. The only entity which could have recovered from the Utilities was Renton. For reasons unexplained in the case, Renton chose not to pursue the Utilities for the delay claim of its contractor but instead defended Scoccolo’s claim.
The bottom line holding of the Scoccolo case is that the Washington State Supreme Court unanimously ruled that a provision in a construction contract which sought to immunize the City from contractor delay damages was void and against public policy. This decision affirmed that indeed RCW 4.24.360 precludes contract clauses which seek to avoid payment of damages for unreasonable delays. These provisions will be stricken by courts regardless of what overreaching terms the parties “agree” to by contract.
2. Getting Around a “No Damages for Delay” Clause.
One approach is that a clear and unequivocal “no damage for delay” clause is valid and enforceable. Such a provision is not contrary to public policy and is justified on the ground of “freedom of contract” and the economic pricing of assumed contract risks. Under this theory the “no damage for delay clause is merely a part of the economic packet upon which the parties agree” because a contractor may adjust its price to compensate for risks assumed, the propriety of the contractor’s expressed assumption of the risk is commercially supportable.
Notwithstanding the general enforceability of a “no damage for delay” clause, the clause remains subject to over arching implied obligations read into every contract namely, (1) the implied obligation of good faith and fair dealing, (2) the implied obligation of cooperation and (3) implied obligation of non-interference. The judicially created exceptions have a common thread of non-enforcement in the face of delay constituting a breach of the owner’s implied obligations of good faith and fair dealing, cooperation and non-interference.
- Fraud Misrepresentation or other Bad Faith Exception. A classic illustration of getting around a “no damage for delay” clause by bad faith conduct occurred in a case where the general contractor repeatedly failed to honor its promises to provide surveyors that was required by the subcontractor to begin its trench work. The general contractor also “spoon-fed” payments to the subcontractor, which further delayed the project because of the crippling lack of capital and prevented the subcontractor from hiring sufficient personnel to advance the project. Then the general contractor grossly inflated the back charges which the jury found was a willful and malicious attempt to break the subcontractor. Kalisch-Jarcho v. City of New York.
- Active Interference. A public owner represented in its specifications for the excavation work that a lake at the site would be drained and would remain in a “drawdown” condition until all of the silt had been excavated for the project. In fact, the lake remained full for most of the contractor’s performance, delaying the contractor was delayed in its completion of the project. The court found “active interference” existed, which was a breach of the implied obligation of cooperation and non-hindrance. Thus the clause had no effect. Lester N. Johnson v. City of Spokane, 22 Wn. App. 265, 588 P.2d 1214 (1970).
- Unreasonable Delay. Many courts have found that a “no damage for delay” clause was vitiated by a material breach of contract that would have permitted repudiation of the contract by the non-breaching party. People ex rel. Wells & Newton Co. v. Craig, 232 N.Y. 125, 133 N.E. 419 (1921).
- Delays not Contemplated by the Parties at the Signing of the Contract. City of Seattle v. Dyad Constr., Inc.; Sheehan v. City of Pittsburg, 213 Pa. 133, 62 A. 642 (1905).
- Waiver of the “No Damage for Delay” clause. An owner’s failure to comply with the contractual requirements or an owner’s conduct which evidences waiver is an exception to the application of the “no damage for delay” clause. Corrinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 493 N.E.2d 905 (1986).