Falcon: Are no-damage-for-delay clauses enforceable?

Falcon

By Brian M. Falcon

For those of us who routinely represent contractors, we are all familiar with the no-damage-for-delay clause, which attempts to preclude a contractor from recovering monetary damages caused by a project delay. While we all understand that NDD clauses are generally deemed to be enforceable in Indiana, we are also generally aware that there are recognized exceptions to enforceability elsewhere. Those exceptions include for delay: (1) caused by the owner’s bad faith, willful, malicious or grossly negligent conduct; (2) caused by the owner’s active interference; (3) not reasonably contemplated by the parties at the time of contracting; and (4) of an unreasonable duration giving rise to a practical abandonment of the contract.

When the enforceability of an NDD clause is litigated in Indiana, practitioners commonly rely on the treatment of these exceptions in other jurisdictions, while conceding that Indiana’s courts have not definitively weighed in. But is that position entirely accurate? An Indiana Supreme Court decision from more than 80 years ago suggests it might not be. Before turning to the importance and merits of that decision, though, a quick overview of a more recent decision is in order.

The NDD clause was most recently examined in Indiana in depth in Indiana Department of Transportation v. Shelly & Sands, Inc., 756 N.E.2d 1063 (Ind. Ct. App. 2001). But the Court of Appeals’ treatment of the NDD clause was focused primarily on an alleged ambiguity in the clause and the larger impact that public policy should have on such clauses. In Shelly & Sands, the Court of Appeals held that the specific NDD clause at issue was not ambiguous, and that NDD clauses as a general rule are not in contravention of public policy.

In analyzing and evaluating the Shelly & Sands decision though, practitioners should be as mindful about what the Court of Appeals did not address as they are with what it did. For example, none of the commonly recognized exceptions to the enforceability of NDD clauses were squarely mentioned or addressed. So, instead of conceding that Shelly & Sands represents Indiana’s most definitive pronouncement on NDD clauses and using case law from other jurisdictions to chip away at its enforceability, contractors looking to avoid the potentially devastating impact of an NDD clause could instead turn their focus to State v. Feigel, 178 N.E. 435 (Ind. 1931).

There may be a few reasons Feigel gets so little attention when analyzing NDD clauses. Perhaps the most likely explanation is that the now universally accepted term of art, “no-damages-for-delay,” is not specifically used anywhere in the opinion. Furthermore, no lengthy description or discussion of the recognized exceptions is offered by the court in those terms. However, a closer look at the opinion reveals that the groundwork and precedential support to defeat an NDD clause may be hiding in plain sight.

Feigel dealt with a claim by a grading contractor (“Contractor”) against the state of Indiana and a predecessor entity to the Indiana Department of Transportation (“Owner”). The contract documents provided that, in the event of delay through no fault of the Contractor, the Contractor could receive a reasonable time extension, but would not be entitled to any additional monetary compensation. While not used in the terms with which we are all now so familiar, the clause was a classic NDD provision.

The project Owner in Feigel failed to timely meet its contractual obligation to procure and furnish the right-of-way in order to allow the Contractor to proceed with construction. During construction, it was also discovered that the Owner’s engineer negligently performed its staking obligations regarding the grading necessary to complete the work. After facing multiple delays, the Contractor sought recovery from the Owner for monetary damages occasioned by these failures. The Owner relied on, among myriad other defenses, the facts that it provided the Contractor with a time extension and that the contract documents did not allow for monetary damages resulting from delay.

Without addressing or analyzing any of the recognized exceptions in name, the Supreme Court was not persuaded by the Owner’s arguments. The Feigel court determined that the Owner’s reliance upon the NDD clause “might be true if the delay was caused without the fault of either party, but it certainly would not be true where the delay was caused by the public body without right.” Id. at 439. The court further supported its holding by leaning on notions of equity and fairness: “It occurs to us that the plainest principles of justice require the implication, of a covenant, on the part of the [Owner] to provide a right of way so as to enable the [Contractor] to prosecute his work to the utmost advantage and economy. Any other construction would destroy the mutuality of the agreements, and put it practically in the power of the [Owner] to defeat performance by the [C]ontractor.” Id. at 437.

Whether the rationale behind the holding in Feigel might be argued to fall under the delay caused by “active owner interference” or a delay “not reasonably contemplated by the parties,” the import of the decision should be evident. This decades-old holding reflects that, under the right set of facts, precedent exists for responding to and defeating an owner’s claim that an NDD clause precludes recovery for monetary damages sustained by a contractor. Beyond the facts at issue in Feigel though, resort to other jurisdictions may still be necessary. At a minimum, the door is open for monetary relief in the contractor’s favor if the practitioner keeps in mind that Indiana’s treatment of NDD clauses does not begin and end with Shelly & Sands.•

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Brian Falcon is a member at Frost Brown Todd LLC in Indianapolis. He concentrates his practice in construction law and litigation, public contract law, surety law and business litigation. The opinions expressed are those of the author.