By: J. Kent Holland, Jr.
A contractor that was delayed in completing its construction of three buildings on a college campus due principally to the existence of an excessive number of errors, omissions and conflicts in the design documents provided by the owner was not entitled to recover monetary compensation because it had agreed to a no damage for delay provision in the contract, and because it failed to meet the contractual requirement of requesting a time extension. The contract provided, “Time is of the essence to the Contract Documents and all obligations thereunder.” In the event of delay, the contract provided specific procedures for contractor notice to the owner and for relief to the contractor. Specifically, the contract provided that the contractor’s failure to request an extension of time within ten days after the occurrence or condition necessitating an extension of time “shall constitute waiver by the Contractor of any claim for extension or for mitigation of liquidated damages.” A no-damages-for-delay clause in the contract provided that “extension of time … shall be the sole remedy which may be provided by the Department” and that Contractor shall not “be entitled to additional compensation or mitigation of Liquidated Damages for any delay….”
Work by the contractor fell behind schedule to the point that it appeared to the owner that the project would not be completed in time for college classes in the Fall. Despite the delays in completion, the contractor did not make any written requests for an extension of time for the delays in question. Attempts to get the project on schedule were unsuccessful and the Owner terminated the contractor and replaced the contractor with another. From the amount outstanding which the Contractor demanded from the Owner, the Owner deducted the reprocurement costs paid to the replacement contractor. Owner also assessed liquidated damages for 188 days of delay. In response, Dugan & Meyers filed suit seeking $3.4 million.
In its complaint, the Contractor acknowledged the delays but claimed they were caused by inaccurate and incomplete plans that required it to submit over 700 requests for information (RFIs). Contractor also alleged that no timely response was provided to many of the RFIs, and that the architect issued over 250 field work orders and 85 architectural supplemental instructions directing Contractor to perform work outside the contract. The essence of the complaint was that the Owner breached its duty to provide the Contractor with plans that were buildable and accurate, and that the Owner unreasonably rejected legitimate time extension requests. The Owner responded with a counterclaim for liquidated damages and for costs of substituting another contractor.
The trial court case was assigned to a referee who found that the contractor’s delay was excusable due to errors, omissions and conflicts in the design documents provided by the owner. The referee concluded that the owner had breached its contractual duty to the contractor and that the contractor was excused from liquidated damages and in fact entitled to additional compensation for the delay and impact costs caused by the defective design documents. The Spearin doctrine was the basis for the Owner’s duty to the contractor said the referee.
The Ohio Court of Claims referee’s decision was appealed to the Ohio court of appeals. The appellate court reversed the trial court, and the Ohio Supreme Court, in the case of Dugan & Meyers Construction Company v. Ohio Dept. of Admin Services, 113 Ohio St.3d 226, affirmed the appellate court decision to reverse the trial court.
The first issue the Supreme Court addressed was whether the Spearin doctrine applied in Ohio to delay in completion cause by plan changes. The Spearin doctrine stands for the proposition that where the government provides specifications, it impliedly warrants the accuracy of its affirmative indications in the documents. The court acknowledged that the doctrine is applied by Ohio courts but concluded that it does not apply to damages flowing from delay in completion resulting from plan changes.
The focus of the decision, however, was not the applicability or non-applicability of the Spearin doctrine. Rather the court keyed in on the unambiguous contract language that addressed the contractor’s remedy when changes were made to the plans. The court found that “even if the plans required more changes than originally contemplated, the contract established a detailed procedure to be followed for the changes.” The court found that the Owner had not made an implied warranty of the plans but that even if it had done so, the implied warranty would not prevail over express contractual provisions concerning the limitations on the contractor’s recovery or the procedures by which the contractor was required to notify the Owner of its claim.
With regard to the no-damages-for-delay clause, the court noted that although the state had recently enacted legislation making such clauses unenforceable, the law was not retroactive and did not apply to this particular case. Looking at the facts of this case, the court held that the clause was enforceable against the contractor. The court reviewed favorably decisions from other states that have upheld no-damages-for-delay clauses – including a Washington state decision that upheld the clause and held a contractor responsible for liquidated damages for delay despite the exisitence of multiple errors and omissions in plans supplied by the owner.
The court also cited Ohio decisions that have strictly enforced contract provisions requiring that the express dispute provisions of a contract must be followed and that the courts “will not rewrite the contract to achieve a more equitable result.”
In this case, the Ohio Supreme Court declined to review and comment on the findings of the trial court that the plans contained numerous errors and inaccuracies and could not be built as provided by the Owner. Instead, the court stated, “the express language of the no-damage-for –delay clause renders irrelevant the cause of the delay.
One final argument by the contractor was that he should be excused from complying with the change-order procedure for requesting time extensions because the Owner had actual notice of the need for changes to the deadline, and any failure to comply with the procedure was therefore harmless error. In looking at the record before it, the court stated that there was no evidence of an affirmative or implied waiver by the Owner of the change-order procedures contained in the contract. The contractor failed to convince the court that its failure to request time extensions was harmless to the Owner. For these reasons, the court held against the contractor.
Comment: The court’s interpretation of the Spearin doctrine seems a bit strained in this decision, and I believe the dissenting opinion of Justice Pfeifer provides a more appropriate understanding of the doctrine and correctly concludes that the Spearin doctrine would be applicable in this case to create an implied warranty of the specifications whereby the contractor should have been able to recover for delay and impact costs (including cumulative impacts). However, the court’s analysis of the express provisions of the contract requiring the contractor to follow specified notice and disputes procedures appears to be solid. Thus, even if the Spearin doctrine should have been applied, the contractor would not be excused from express, unambiguous provisions of the contract that required requests for time extensions be timely filed and provisions barring monetary compensation for delay.
This decision should once again be a reminder to contractors to pay attention to the details of their contracts when negotiating them. Design professionals are generally advised against agreeing to “time is of the essence” clauses since performing professional services consistent with the exercise of the appropriate standard of care may not permit the schedule to be satisfied despite diligent prosecution of the professional services. Contractors on the other hand must typically agree to such clauses and should be aware of the consequences and pay attention to any time requirements set forth in the contract for reporting delays to which the contractor believes relief from the schedule is warranted. “No-damage-for-delay” clauses shift significant financial risk to the Contractor because even where delays are caused by others, the contractor forfeits its right to recover costs. More states are beginning to enact legislation prohibiting such clauses –at least in the context of public or government agency contracts, but these clauses are still used in many, many contracts – particularly in the private sector. Ohio also enacted legislation but it did not apply retroactively to apply to the contract in this case. Assuming the clause cannot be negotiated out of the contract, all bidders/contractors will need to add a contingency to their bids on the project in an effort to include in their price the cost of delay and impact costs that they will not be able to recover through change orders. Personally, I believe it is preferable that owners allocate risk more reasonably and avoid inflated bids that include contingencies to cover possible delay costs.
About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice representing design professionals, contractors and project owners. He is principal of ConstructionRisk, LLC, providing insurance risk management services and construction risk management services, including but not limited to, advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation. Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 9, No. 6.