Subcontractor Beats No-Damages-For-Delay Clause and Recovers Material Escalation Costs

In Southern Seeding Service, Inc. v. W.C. English, Inc., a dispute arose out of a $100-million project owned by the North Carolina Department of Transportation (“NCDOT”).  The NCDOT entered into a prime contract with APAC-Atlantic, Inc. (“APAC”), incident to the prime contract, APAC subcontracted the grading and seeding to W.C. English, Inc. (“English”) and in turn, English sub-subcontracted the seeding to Southern Seeding Services, Inc. (“Southern Seeding”).  The agreement between English and Southern Seeding contained a “no damage for delay” (“NDD”) clause prohibiting Southern Seeding from recovering monetary compensation as a result of delays to the project.  The NDD clause was written in such a manner that Southern Seeding could recover delay damages if English’s delay damages were caused by NCDOT. 

“In no event shall [Southern Seeding] be entitled to compensation or damages for any delay in the commencement, prosecution, or completion of the work, except to the extent that [English] shall receive such compensation or damages from the Owner or other third-party.”

The agreement between English and Southern Seeding also contained language concerning an equitable adjustment of unit prices:

“Unit prices herein quoted are based upon the assumption that the contract will be completed within the time specified in the specifications at the time of bidding.  Should our [Southern Seeding] work be delayed beyond said time without fault on our part, unit prices here in quoted shall be equitably adjusted to compensate us [Southern Seeding] for increased cost.”

During the project, the Owner (NCDOT) and the general contractor (APAC) entered into a series of supplemental agreements that altered the work and extended the time for performance.  Ultimately, the project was delayed 256 days after its scheduled completion date.  As a result of those delays, Southern Seeding suffered market-driven material and labor cost increases to the tune of approximately $194,000.  Southern Seeding adjusted its unit prices for the increased costs arising from the work performed after the original completion date and invoiced English.  English refused to pay, citing the NDD clause, and Southern Seeding sued English and its sureties on the project payment bond. 

At trial, the court ruled that Southern Seeding’s request to price increase constituted delay damages, but because English was unable to recover the delay damages from the general contractor, APAC, or the Owner, NCDOT.  The court ruled that the NDD clause barred any recovery by Southern Seeding.  Southern Seeding appealed. 

The North Carolina Court of Appeals ruled in favor or Southern Seeding, finding that the parties’ subcontract allocated two distinct risks: the NDD clause allocated to Southern Seeding the risk of extended general conditions arising from delays, while the “equitable adjustment” clause allocated to English the risk of increased material and labor costs arising from unforeseen circumstances.  Accordingly, the NDD clause did not preclude recovery for market-driven cost increases associated with material and labor incurred after the scheduled completion date. 

The court reasoned as follows: 

“While [Southern Seeding’s] relief under [the NDD clause] is limited to the extent English is compensated by APAC or NCDOT . . . , the [equitable adjustment clause in the Southern Seeding/English contract] does not set forth this limitation.  Therefore, we cannot agree with the trial court’s conclusion that [Southern Seeding] was foreclosed from an equitable adjustment under the [equitable adjustment clause in the Southern Seeding/English sub-subcontract].  Such a reading fails to give effect to both contractual provisions and improperly shifts the risk of increased material cost to [Southern Seeding].” 

This decision portrays an important contract maxim.  Courts generally strictly construe contract language if a forfeiture is involved and enforce it only when the language is absolutely clear.  See A+C Blog on NDD clauses dated October 5, 2011.

The court will, wherever possible, attempt to read two seemingly conflicting provisions in harmony to avoid a forfeiture.  In other words, while the trial court found the NDD clause and the “equitable adjustment” clause to be mutually exclusive (the former trumping the latter), the Appeals Court read both together.  It did so by ruling that the price escalation caused by a delay is separate and distinct from delay damages.  This distinction allowed the court to interpret the NDD clause as having no effect on Southern Seeding’s recovery under the “equitable adjustment” provision.

For more background on the NDD clauses see A+C Blogs dated September 15, 2011, September 20, 2011, and October 5, 2011. In Washington construction contract (both public and private) and in Oregon public contracts, NDD clauses are considered by statute against public policy and void.

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