|June 19, 2014|
Previously published on June 18, 2014
In a recent decision arising out of a public construction project, the Superior Court held that the owner’s payment of part of a general contractor’s delay claim did not constitute a waiver of a "no damage for delay" clause as to a subcontractor. The Court determined that the payment to the general contractor was not a clear and complete waiver of the clause as to the general contractor, and even if the payment constituted a partial waiver as to the general contractor, that partial wavier did not extend to the subcontractor’s claim.
The Court’s decision makes clear that in order to establish that an owner has waived a "no damage for delay" clause, a contractor must show a specific intent by the owner to waive the clause as to that contractor.
The case also provides guidance on two points concerning the effectiveness of partial releases: (1) general language purporting to exclude “outstanding change orders” will be ineffective to preserve a specific claim, and (2) partial releases that are not required by the contract documents are unenforceable unless they are supported by consideration separate from the consideration set forth in the contract documents.
The No-damage-for-delay Clause and the Partial Waivers
The relevant subcontract incorporated all of the contract documents, including the general contract, which contained a typical "no damage for delay" clause:
[I]n the case of certain delays caused by the Authority, the Authority shall not be liable for any damages for delay, hindrance, or interruption and the Contractor’s sole and exclusive remedy shall be that the Contract Time shall be extended by Change Order....
As a prerequisite to receiving progress payments during the project, the general contractor required the subcontractor to sign partial releases purporting to release all claims arising out of the subcontract up through the date of payment requisition. The contract documents did not require partial releases, but the subcontractor signed and submitted partial releases in connection with all of its requisitions.
The Delay Claims and the Partial Releases
The project was delayed from the start - through no fault of the general contractor or subcontractor - and extensive delays continued throughout the project. In total, the project schedule was extended by 574 days.
Both the general contractor and the subcontractor asserted delay claims based on labor and material escalation. The general contractor tied its escalation claim directly to the scope of work set forth in change orders approved by the owner for unforeseen surface conditions. The subcontractor’s escalation claim was not tied to any approved change orders. The general contractor asserted the two claims separately.
The subcontractor attempted to preserve its rights with respect to its escalation claim by inserting exclusionary language into its partial releases. In each partial release, the subcontractor included handwritten notes to the effect that the releases did “not waive or release...unpaid extras (whether or not approved).”
The owner approved part (and denied the rest) of the general contractor’s escalation claim, and denied the subcontractor’s escalation claim in full.
Following the project, the general contractor and the owner settled all outstanding claims arising out of the project. The subcontractor was not a party to the settlement agreement.
The subcontractor then initiated an action against the general contractor, alleging that by entering into the settlement agreement, the general contractor improperly released the subcontractor’s escalation claim.
The general contractor defended by asserting that (1) the subcontractor waived its escalation claim by submitting the partial releases, and (2) even if there was no waiver, the "no damage for delay" clause barred the subcontractor’s escalation claim (and therefore the subcontractor was not “damaged” by the release of the claim).
Whether the Partial Releases Constituted a Waiver of the Escalation Claim
The general contractor first argued that the partial releases constituted a waiver of all claims arising out of the subcontract up through the date of each requisition - including the escalation claim. The subcontractor argued that its handwritten notations providing that the releases did not apply to “all outstanding change orders” preserved the escalation claim.
The Court determined that the handwritten notes were not sufficient to preserve the escalation claim because the notes excluded only “outstanding change orders or retainage.” In order to preserve the escalation claim, the subcontractor would have had to specifically identify the escalation claim in the handwritten notes.
The Court then determined, however, that the partial releases were unenforceable because the contract documents did not require the subcontractor to submit partial releases in exchange for payment, and there was no separate consideration given by the general contractor in exchange for the obligation to submit partial releases. If the contract documents had required partial releases as a prerequisite to payment, then the executed partial waivers would have been enforceable and would have constituted a waiver of the subcontractor’s escalation claim.
Because the contract documents did not require partial releases, however, and because the general contractor did not give any separate consideration to the subcontractor in exchange for the requirement to submit partial releases, the partial releases were unenforceable. Accordingly, the executed partial releases did not constitute a wavier of the escalation claim.
The Escalation Claim
Having surpassed the general contractor’s waiver defense, the subcontractor next had to overcome the "no damage for delay" clause and show that it would have been entitled to recover its escalation costs from the owner if the general contractor had not released that claim in the settlement. The subcontractor argued that the "no damage for delay" clause was unenforceable because the owner waived the clause by paying the general contractor for a portion of the general contractor’s escalation claim.
In determining this issue, the Court noted that the waiver of a contractual right must either be explicit or be based on conduct that clearly and unequivocally indicates that the party intended to waive its rights.
Based on this standard, the Court first found that the owner did not “clearly and completely” waive the "no damage for delay" clause as to the general contractor because the owner paid only a portion of the general contractor’s escalation claim. Instead of unequivocally waiving the "no damage for delay" clause in full, the owner merely “softened its position” with respect to the general contractor’s escalation claim, likely in an effort to maintain a harmonious relationship with the general contractor.
The Court also noted that the owner “apparently viewed” the general contractor’s and the subcontractor’s escalation claims differently because the general contractor’s claim was tied directly to the scope of work set forth in approved change orders, while the subcontractor’s claim involved only delay damages.
The Court next determined that even if the payment of part of the general contractor’s escalation claim constituted a partial waiver of the "no damage for delay" clause, that partial waiver would extend only to the general contractor. In order to establish a waiver as to its delay claim, the subcontractor was required to demonstrate a clear and unequivocal intent by the owner to waive the "no damage for delay" clause as to the subcontractor.
As an example, the Court cited a case in which a waiver as to a plumbing subcontractor was established because the owner paid the delay claims of both the general contractor and the electrical subcontractor, and also sent letters stating an intent to consider the plumbing subcontractor’s delay claim. In contrast, the evidence in the present case showed that the owner consistently denied the subcontractor’s escalation claim throughout the project - even as it “softened its position” with respect to the general contractor’s escalation claim.
This case provides several important principles for contractors:
Partial releases may be determined to be unenforceable if they are not required by the underlying contract documents.
If contract documents do not require partial releases, the partial releases must be supported by consideration separate from the consideration set forth in the contract documents.
Contractors must clearly and specifically identify any claims they seek to preserve in releases. Otherwise, they risk inadvertently waiving claims they sought to preserve.
In order to establish the wavier of a "no damage for delay" clause, a contractor must provide evidence showing a clear and unequivocal intent by the owner to waive the clause as to the contractor. Absent such evidence, courts are unlikely to find that a "no damage for delay" clause has been waived.
 The subcontractor did include a specific reference to its escalation claim on one of the final partial releases that it submitted.