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The Construction Advantage – Issue 11
Welcome to the first Thanksgiving edition of The Construction Advantage! In this issue, we bring you yet another tale of a mechanics lien case and a priority between an engineer and a lender in a failed golf course project. We then present two “no delay for damage” cases, with very different facts and very different outcomes. We hope that you enjoy our newsletter, and we welcome any comments on this edition or any of our previous issues. Enjoy the Thanksgiving holiday with friends and family! Gobble Gobble!
Engineers in Idaho: Working Remotely is Lienable!
In Hap Taylor & Sons, Inc. v. Summerwind Partners, LLC et al., No. 40514, 2014 WL 5861063, — P.3d –, (Idaho Nov. 13, 2014), the Idaho Supreme Court clarified the application and extent of a professional services mechanic’s lien under Idaho law. This case involved the infrastructure development of a residential subdivision and golf course near Greenleaf, Idaho. When construction stalled due to non-payment, liens were recorded on the project and the lenders foreclosed, setting up a battle over the land as collateral. The court held that an engineer’s lien relates back to the date the engineer commenced to furnish any authorized services for the project. The court’s ruling reversed the lower district court which had held that Idaho law only permitted the engineer’s lien to claim back to the first date of physical work conducted on the property at issue. Here, the lower court’s ruling essentially limited the claimant engineer’s damages to recovery for work done on site after construction began.
Unlike ME mechanic’s lien law which relies on a notice and consent concept to establish priority, under Idaho law mechanic’s liens only trump other encumbrances and interests that arise after the lien right is established. Under Idaho Code § 45-506, mechanic’s liens are “preferred to any lien, mortgage or other encumbrance which may have attached subsequent to the time when the . . . professional services were commenced to be furnished . . .” The Idaho Supreme Court acknowledged that though “commenced to be furnished” as to materialmen means a lien right only arises when materials are first delivered on site, professional services are fundamentally different from the provision of materials. The court goes on to confirm that under the Idaho Code, and in contrast to a materialman’s lien, an engineer’s mechanic’s lien has priority dating from the first professional services the engineer renders under the contract regardless of where those services are rendered. The Idaho Supreme Court does note that the lien only attaches for professional services actually provided but priority for those services is established on the first date that services are provided over any encumbrance that attaches after such date.Thus, in this case, the engineer gets paid before the mortgage holder.
Where Idaho and ME are consistent is that the lien arises upon performance of any contracted services by the design professional. Thus, this ruling demonstrates that as to a design professional, the lien may arise well before any actual work is performed on the site. In ME, to the extent that a subsequent lender knows and consents to the design professional’s services to the project, the design professional’s subsequent lien may well trump the lender’s construction mortgage.
When Does a ‘no damage for delay clause’ Apply? It Depends!
This summary presents two cases, one from Texas and one from Connecticut, that analyzed “no damage for delay clauses” and reached different conclusions. Like so many cases, these two claims turned on the facts present in each matter. This is just another reminder that the precise facts of a case are not only important, they are usually dispositive.
In the first case, the Texas Supreme Court concluded that a no damage for delay cause was unenforceable where the jury found that the owner’s conduct was arbitrary and capricious, constituted active interference, and as well as bad faith and fraud. In Zachry Construction v. Port of Houston Authority, Zachry Construction was hired to construct a wharf on the Bayport Ship Channel for the Port of Houston Authority. The wharf was to consist of a concrete deck supported by piers extending out over the water, would be used to load and unload ships containing carrying containerized goods, and would be long enough for two ships to dock stern to bow. Zachry was specifically identified as an independent contractor in the prime agreement and was in sole charge of determining the means and methods for conducting the work. Zachry had an innovative plan to use soil dredged from the channel to construct a berm around the work area and remove the water so that it could work “in the dry.” Nine months into the project, the port realized it needed an additional 332 foot section added to the wharf and discussed a change order with Zachry. The port objected to Zachry’s planned method of completing the work, which involved a continued berm and dewatering, because the port was worried that the method of dewatering might destabilize some of the existing work that already was completed. Although the port initially deferred, it then abruptly reversed itself and ordered Zachry to proceed in a manner contrary to its own plan, with the result that it had to work “in the wet,” which both delayed completion of the project and increased its cost. When the project was finished late, the port withheld $2.6 million in liquidated damages and denied Zachry’s $30 million delay claim. The port relied upon a standard “no damage for delay clause” in the agreement to deny recovery of the delay damages.
After a three-month trial, a jury concluded that the port had breached its contract and that Zachary should be awarded $18.6 million in delay damages as a result of the port’s behavior in mandating Zachry’s means and methods and ordering Zachry to complete the work in a different manner. The jury found the Port’s conduct to be “arbitrary, capricious, active interference, bad faith and fraud.” An intermediate appellate court reversed the jury verdict and concluded that the no damage for delay clause was binding and valid. The Supreme Court of Texas disagreed and reinstated the jury verdict. The court noted that a contractor generally can agree to assume the risk of construction delays and waive the right to seek damages. However, as many courts have concluded, a list of generally recognized exceptions exist for enforcement of such agreements including:
- When the delays are ones not intended or contemplated by the parties to be within the purview of the provision
- Resulting from active interference, fraud, misrepresentation or bad-faith by the party seeking the benefit of the provision
- That it was extended for an unreasonable length of time such that the party delayed could have abandoned the contract
- That is was not within the specifically enumerated delays to which the clause applied
Although the appellate court said that it had to hold Zachry to its contractual waiver, the Texas Supreme Court concluded that the jury’s verdict fell squarely within the exception for active interference, fraud and misrepresentation. The court said that although parties generally should be held to their contracts, it would not incentivize the owner’s wrongful conduct in intentionally delaying the contractor’s performance and ordered the way in which it had to complete its work.
In the second case, the Connecticut Supreme Court concluded that a “no damage for delay” clause was perfectly acceptable and enforceable on a school renovation project. In C and H Electric v. Town of Bethel, a school renovation project required the abatement of some asbestos that had been used in the original school construction in the 1960s. Although the plan was to completely abate the asbestos prior to the construction project, for reasons unclear in the record, 30% of the asbestos was left at the start of construction. Although the fact of the remaining asbestos was not hidden, and was actually shown on the construction plans, the contractor testified he was unaware of the condition. The contract between the town and C and H Electric had a standard no damage for delay clause which contained a specific exception for delays “caused by acts of the town constituting active interference” with the contractor’s performance of the work. The contractor began work, and several months into the project was barred access to portions of the site so that the remaining 30% of the asbestos could be abated. This forced the general contractor to move its crew and equipment to different work areas and repeatedly return to certain areas of work as the abatement proceeded. Despite the delays, the contractor actually finished the work on time, but claimed added expenses.
Following a trial, the trial court concluded that the town had not actively interfered with the contractor. The court noted that the town had not concealed the condition of the remaining asbestos and even had disclosed it on the plans. Here, the Connecticut Supreme Court upheld application of the clause to C and H Electric. The court noted that the purpose of a “no damage for delay” clause is to shield property owners from claims by contractors when delays occur on a project, leaving as the sole remedy for a contractor an extension of time to complete the work. Like Texas, Connecticut had established common exceptions to the clause, including delays caused by the owner’s bad faith; uncontemplated delays; delays so unreasonable that they constitute abandonment of the contract; and delays resulting from a owner’s fundamental breach of the contract. The Supreme Court indicated that in order to demonstrate active interference, a contractor did not necessarily need to suggest bad faith or malicious intent, just actions taken willfully or with purpose as opposed to passive omission. The court concluded that the delays also had to be something more than ordinary construction delays, including those reasonably foreseen by the parties on the project. On these facts, the Supreme Court found that there was nothing to suggest that the town knew that the remaining asbestos abatement would disrupt or delay the contractor’s work. The time to complete the project accounted for the time needed to abate the remaining asbestos, and in fact, the contractor finished on time. The town did nothing to hide the fact that asbestos abatement remained to be completed, and thus, under these facts, the court found that clause applicable and denied the contractor’s extra expenses to work around the abatement.
These two cases set benchmarks if you find yourself attempting to enforce or defeat a “no damage for delay clause.” The key to these claims will often turn on the conduct of the parties. A contractor will normally need to find some wrongful active conduct, although not necessarily bad faith, in order to claim an exception to the contractually-agreed to waiver of delay damages. In the Texas case, that conduct existed, and surely part of the influence was that the owner piled on by not only denying the claim but by assessing liquidated damages. In the Connecticut decision, the conduct was absent, and the court was swayed by the fact that the asbestos was shown on the plans and the contractor was inattentive to them. In any jurisdiction, of course, you will need to know whether a judicially crafted exception exists, and the precise contours of that state law, and a thorough analysis of the facts will enable you to judge the strength of your claim or defense.
We hope that you have found these tips and pointers in the eleventh issue of The Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice is available to answer the day to day questions of your business as you work on projects.