If So, It May Not Be Valid.
William C. Last, Jr.
The majority of prime contracts and subcontracts contain a clause that limits a claim for delay damages to an extension of time for the completion. In this event, a delayed contractor may not be entitled to compensation for the additional costs associated with the delay. However, if the project is a public works project for the State of California or a lesser political subdivision, such a clause may be void.
California Public Contract Code section 7102 provides:
Contract provisions in construction contracts of public agencies and subcontracts thereunder which limit the contractee's liability to an extension of time for delay for which the contractee is responsible and which delay is unreasonable under the circumstances involved, and not within the contemplation of the parties, shall not be construed to preclude the recovery of damages by the contractor or subcontractor. No public agency may require the waiver, alteration, or limitation of the applicability of this section. Any such waiver, alteration, or limitation is void. This section shall not be construed to void any provision in a construction contract which requires notice of delays, provides for arbitration or other procedure for settlement, or provides for liquidated damages.
In a case entitled Howard Contracting, Inc. v. Macdonald Construction Co., Inc. and City of Los Angeles (1998) 71 Cal.App.4th 38, a California appellate court rendered a decision applying the foregoing Public Contract Code section. In the Howard case, a subcontractor and the general contractor on a public works contract relating to a construction project to rehabilitate the Venice canals sued the City of Los Angeles (the owner and designer of the project) to recover damages for various breaches which resulted in project delays and disruptions. The prime contract contained a no damage for delay clause. The court held that a no damage for delay clause contained in the contract did not preclude the recovery of delay damages under Pub. Contract Code 7102.
The Howard case is also of note for the other holdings in the decision. As earlier articles have explained, in every construction contract the law implies a covenant that the owner will provide the contractor timely access to the project site to facilitate performance of work. If a non-public entity owner had failed to make such disclosures, the owner who conceals or fails to disclose material information to another is liable for fraud. However, conduct by a public agency that would otherwise be a fraudulent misrepresentation is treated as a breach of contract. The underlying theory is that providing misleading plans and specifications constitutes a breach of the implied warranty of correctness.
In the Howard case, the City knew that certain regulatory agencies intended to impose restrictions on removal of materials from the project site. However, the city's plans and specifications did not include any provision regarding the anticipated difficulties that would result from the regulatory restrictions. Additionally, the bid documents did not contain any information about the adverse conditions contractors were likely to encounter. When the construction was to commence the contractor discovered that the necessary permits relating to the project were not available and access to the site was limited by the owner. As a result, the Court held that the implied covenant was breached and the city was liable for the resulting damages.
The Howard case is also significant in that the court held that as a matter of law, a general contractor can present a subcontractor's claim on a pass-through basis. When an owner breaches a construction contract with the general contractor, the subcontractor may also be damaged. The subcontractor may not have legal standing to sue the owner since he is not direct party to the prime contract. Thus, the subcontractor may be barred from asserting a claim directly against the public agency. In such a situation the subcontractor would pursue his claim against the general contractor. In turn the general contractor is allowed to present a pass-through claim on behalf of the subcontractor against the public agency.
In the Howard case the prime contractor and owner entered into an agreement which provided that the general contractor would pursue the subcontractor's claim on a pass-through basis in exchange for the subcontractor's agreement to accept any damages recovered by the general contractor on its behalf as full resolution of its claim. The court held that such an agreement provided a legal basis for the recovery of delay damages for subcontractor's pass-through claim.
The Howard court also discussed the necessity for a critical path method schedule to prove a delay claim. In the case the City contended that the holding in "Mega Construction Co., Inc. v. United States (1993) 29 Fed. Cl. 396 requires a contractor to use a computer-generated network diagram schedule, known as a critical path method schedule, to establish a claim for construction delay damages." The court held that a bar chart that indicated the critical path delays would suffice since the contract did not require the contractor to prepare a critical path schedule.
The Howard court also held that the home office overhead expenses could be calculated using the Eichleay formula. That formula was based on decision in a federal Board of Contract Appeal case against the Eichleay Corporation. The formula is calculated as follows: Overhead allocable to the contract equals contract billings divided by total billings for the contract period times total company overhead for the contract period. Daily contract overhead equals allocable overhead divided by days of performance. Amount of company overhead equals daily contract overhead times number of delay days.
Finally, the Howard case also allowed the delay damages be calculated based on the contractors planned completion date rather than the completion date in the contract. In the case the City argued that "the trial court erred in not following the three-prong test set forth in Interstate General Government Contractors v. West (Fed. Cir. 1993) 12 F.3d 1053 for determining the recoverability of extended overhead."
Interstate General established the rule that a contractor cannot recover on a claim for unabsorbed office overhead where it is able to meet the original contract deadline or finish early despite a government-caused delay. An exception applies where the contractor demonstrates from the outset an intent to complete the work early, a capacity to do so, and a likelihood of early completion but for the government's delay. Application of the three-prong test requirement of Interstate General, however, is required only where the contractor finishes the work by the original specified contract completion date or earlier.
If you are confronted with a possible delay you should review the relevant contract clauses to determine when and how notice of the delay is to be provided to the party you contracted with for the project. If there is a no damage for delay clause in a state public works contract you should notify the owner that it may be invalid under Public Contract Code section 7102. You should also maintain contemporaneous records that indicate how the event that is delaying the completion of the project is impacting you.
The implied covenants that the plans and specifications are complete and that access to the site will be provided in a timely manner can be the basis of a claim against a public entity. It is not uncommon to learn during the course of construction that the public entity had certain critical evidence that it failed to disclose. Many times if you had that information your bid would have been higher to account for impact of that information on the timeliness and scope of work.
Many general contractors fail to make the distinction between a pass through and a non-pass through claim. If the subcontractor's claim is based on the actions or inactions of the owner, the general contractor should make it clear in its correspondence with the subcontractor and in any change orders that payment for the additional work is predicated on the owner's approval. If you are a subcontractor you should attempt to make the contractor responsible for paying for the additional work even if the owner denies the claim. The prime contractor should also make every reasonable effort to present the subcontractor's claim to the owner. If the amount of the claim is large, the subcontractor and general contractor may want to use the same type of pass through agreement that was used in the Howard case.
This article, 2001, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.