Scott E. Mollen
Scott E. Mollen ()

Construction—”No Damage For Delays” Clauses Are Generally Valid—Court Discussed the Exceptions to Such Rule

This decision involved pre-answer motions to dismiss by a defendant University and a defendant construction manager (CM). The plaintiff was a subcontractor.

In October 2010, the CM entered into a contract with the university. The CM agreed to provide construction management services in connection with a development project. The CM had hired the plaintiff pursuant to a written subcontract in 2013. The subcontract permitted the CM to assign the subcontract. In August 2015, the CM and the university executed an assignment and assumption agreement, pursuant to which the CM assigned the plaintiff’s subcontract to the university. The assignment agreement provided that the assignee, the university, agreed to assume all obligations of the CM to the subcontractors and the assignor would have no further obligations, provided that the assignor will hold the subcontracts solely as agent for the assignee, as further provided in a July 2013 CM agreement between assignee and assignor. The assignment agreement further provided that “the privity of contract shall exist solely between assignee and subcontractors.”

The effective date of the assignment, was July 1, 2013, about two years before the assignment was made, but five months after the subcontract was signed. The CM did not provide the court with executed copies of the assignment agreement or the referenced CM agreement dated July 1, 2013. The moving papers contained a CM agreement dated Oct. 15, 2010. “Such discrepancy might be attributable to a typographical error,” but regardless, the plaintiff acknowledged receipt of the assignment by letter dated Aug. 27, 2015.

On March 10, 2016, the plaintiff commenced the subject action against the university and the CM. The first cause of action sought damages for “wrongfully withheld…retainage” and for the subcontract balance. The second COA sought damages for extra work for which no change order had been issued (“extra work”). A third COA sought recovery for damages, based on “delays and other alleged breaches of contract….” A fourth COA sought damages based on “defendants’ failure to issue a base line critical path method (CPM) schedule and updates and/or properly manage and coordinate the work.” A fifth COA, sought “interest…based on defendants’ failure to timely pay the subcontractor’s bills.”

The CM moved to dismiss all claims pursuant to CPLR §3211(a)(7), based on lack of privity. Alternatively, the CM moved to dismiss the second, third and fourth causes of action pursuant to CPLR §3211(a)(1), citing provisions of the subcontract and sought a declaration that the subcontract language barred any remaining claims. The plaintiff stipulated that the CM had “no obligations post July 1, 2013.” The only issue the court was to decide is “what obligations if any [CM] has from Feb. 25, 2013 to July 1, 2013″ when the assignment became effective.

The court explained that were it not for “the words ‘as of the effective date,’” the court would “likely find that the assignment agreement releases [CM] from…all liability for the period from Feb. 25, 2013, when its subcontract with [the plaintiff] took effect, through July 1, 2013, defined as the effective date of the assignment.” However, since the assignment relied on provisions in the CM agreement dated July 1, 2013, to define the continued obligations of the CM and no such document had been submitted to the court and the assignment was effective five months after the commencement date of the subcontract, the court speculated that the parties to the assignment “could have intended to carve out a period of time when [CM] would retain liability.”

However, such intent could not be determined based on the current record. Moreover, the language in the assignment that “privity of contract shall exist solely between assignee [university] and subcontractors” could “be read to be prospective from the effective date of the assignment, and not retroactive to the effective date of the subcontract.” Such reading is consistent with the notice of the assignment sent by the CM to the plaintiff, which reiterated the “July 1, 2013 effective date of the assignment.”

Thus, the court granted the CM’s motion to dismiss claims against it effective July 1, 2013, based on a lack of privity, but denied dismissal on that ground for the period between Feb. 1, 2013 through July 1, 2013. With respect to the period prior to July 1, 2013, the CM has “additional arguments that overlap in substantial part with those made by [the university].”

The university and CM had moved to dismiss the second, third and fourth causes of action based “on documentary evidence and failure to state a [COA], and for a declaration barring any remaining claims by [the plaintiff] as precluded by the subcontract.” The defendants argued that the second COA sounded “in quantum meruit” and must be dismissed since the subcontract addresses the same subject matter.

“The controlling precedent with respect to delay damages is Corinno Civetta Constr. v. City of New York, 67 NY2d 297 (1986). Corinno reaffirmed the holding of Kalisch-Jarcho v. City of New York, 58 NY2d 377, 385 (1983), involving “damages reasonably foreseeable by the parties, but held that such clauses are not enforceable to…prevent the recovery of damages resulting from the contractee’s grossly negligent or willful conduct.” Corinno also held that “damages resulting from uncontemplated delays caused by the contractee may be recovered despite the existence of a broad exculpatory clause relieving the contractee from liability.” Corinno identified exceptions to the general rule that a “no damages for delay clause” is enforceable and not violative of public policy if the subject clause and contract “satisfy the requirements for the validity of contracts generally….”

The following exceptions “permit recovery of damages,” notwithstanding “a ‘no damages for delay’ clause”: “(1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract.” The court further noted that “these exceptions are ‘strictly construed.’”

The following is the broad “waiver of damages arising from delays” language (waiver) which limited the plaintiff’s remedies to extensions of time:

All extensions of time shall be in lieu of…any claims for…damages against the contractor or owner. The granting of an extension of time shall be without prejudice to any other rights of the contractor [CM]…. Notwithstanding anything to the contrary in the contract…, [plaintiff] expressly agrees not to make, and…waives any claim for damages, including without limitation those resulting from increased labor or material costs, on account of any hindrances, obstruction or delays from any cause whatsoever, including without limitation, ordering changes,…, suspension, or rescheduling of the work, whether or not the delays or their causes or their length were foreseeable or contemplated by the parties when they entered into this [contract]…. The parties agree that an extension of time…shall be the sole remedy of [plaintiff] for, and [plaintiff] waives its right to any claim for damages to the extent arising from, any (i) delay in the commencement, prosecution or completion of the Work, (ii) interferences caused by delay, (iii) cumulative impact, (iv) hindrance or obstruction in the performance of the Work, (v) loss of productivity, or (vi) other similar claims.

The university asserted that the waiver bars the second COA claim based on “increased labor and material costs incurred for extra work performed at defendants’ direction for which no change order was issued (‘extra work’).” The university also argued that the extra work claim is barred by the contractual requirement that any dispute as to whether work is within the original scope of work or whether such work constitutes extra work, must be resolved pursuant to a procedure whereby the plaintiff submits claims in writing to the CM within five days of the occurrence. That provision provided that the plaintiff will have “waived its…claims for extra work, damages and/or extensions of time” if such written claim is not submitted in accordance with such contract procedure and “[f]ailure to comply strictly with these requirements shall constitute waiver of any claim for extra compensation or damages on account of the performance of such work….”

The court noted that except for the plaintiff’s second COA claim, based on “‘lost time for the Nov. 19, 2014 stop work order issued by the [NYC Department of Buildings] due to no fault of plaintiff,’ the extra work claims [were] not tied to delays and therefore [were] not barred” by the waiver. Regardless of whether increased costs for extra work were caused by delays, the plaintiff still had to comply with the notice provisions for extra work which are “strictly enforceable and treated as a condition precedent to recovery.” Additionally, the university contended that the plaintiff “failed to plead compliance with the notice provisions and that documentation” demonstrates that “the required notice was not given,” and therefore, they were waived. The plaintiff relied on a “first” notice of claim dated Oct. 10, 2014, and a more extensive one dated Jan. 12, 2015.

The plaintiff countered that CPLR §3015(a) provides that “the ‘performance or occurrence of a condition precedent in a contract need not be pleaded’ with particularity” and reasoned that “compliance with the notice provisions has been sufficiently alleged in the complaint.” The court agreed. However, it was “more questionable” as to whether the letters proffered by the university constitute “‘documentary evidence’ which the court may consider on a pre-answer motion to dismiss.” The court found that such letters were “documentary evidence within the meaning of CPLR §3211(a)(1).” However, “standing alone, the letters neither ‘utterly refute’ the plaintiff’s allegations of notice nor establish a defense as a matter of law.” The letters lacked “sufficient specifics,” e.g., “as to when the work was completed. Therefore, apart from the “stop work” claim, the court declined to dismiss the second COA for extra work and any of the causes of action based on improper notice, “without prejudice to renewal of the motion as a motion for summary judgment either before or after testimonial discovery.”

With respect to the “stop work” claim in the second COA and all claims in the third and fourth COA, the university asserted that such claims are barred by the waiver since they asserted damages for “various delays, inefficiencies, disruptions and interferences caused by the defendants.” The plaintiff, “[i]n an obvious attempt to fit the claims within one or more of the Corinno exceptions,” asserted that “the delays were ‘not contemplated by the parties and/or were caused by defendants’ bad faith, willful, malicious, recklessly indifferent or grossly negligent conduct and/or were so unreasonable that they constituted an intentional abandonment of the subcontract and/or resulted from defendants’ breach of its fundamental obligations under the subcontract and of good faith and fair dealing….’”

The court held that the plaintiff’s conclusory claim could not overcome the waiver and meet the “plaintiff’s heavy burden to show an exception to Corinno.” The third COA embodied “specific allegations regarding delays…due to issues such as defendants’ failure to supervise and coordinate work, extensive construction changes and interferences, out-of-sequence work, and excessive redesign of building systems.” The court found that such reasons for delay are “precisely the type of contemplated damages barred by Corinno….” Moreover, the plaintiff had “failed to include even a single allegation in the third [COA] to create an issue relating to a potential Corinno exception based on defendants’ bad faith, uncontemplated delays, delays so unreasonable as to constitute an abandonment of the contract, or delays tantamount to a breach of a fundamental contractual obligation.”

The court reached a similar conclusion with respect to the second COA for delay damages caused by the stop work order. The waiver contained “no exception…based on a denial of access to the site.” In fact, the waiver “expressly includes damages for delays caused by ‘suspension’ of work.” Additionally, because “a stop work order ‘may not have been anticipated, the possibility, however unlikely, of [such a suspension of work] arising was contemplated and addressed by the parties in their agreement.’”

The court also held that the fourth COA claim involving delays based on “poor contract administration and scheduling issues,” fell “squarely within” the waiver. Thus, the court dismissed the third and fourth causes of action, as well as the second COA relating to delays caused by the stop work order. The court also opined that no arguments had been advanced justifying dismissal of the first COA, which sought a declaration barring any remaining claims by the plaintiff. The first COA was based on nonpayment of monies due under the subcontract and is unrelated to the delay issue. Similarly, the fifth COA for interest due on late payments was also “unrelated” to the delay issue and therefore, the court would not dismiss those claims.

WDF v. The Trustees of Columbia Univ., 651250/16, NYLJ 1202775694897, at *1 (Sup., NY, Decided Nov. 10, 2016), Ostrager, J.