Contractor delay claims can spell disaster for owners. Not only do they bust budgets, but they can threaten the owner’s existence. Consequently, owners seek no-damages-for-delay (“NDFD”) clauses in their construction contracts to shift the risk of their own delay-causing conduct to the contractor. A typical NDFD clause provides that the contractor will have no right to damages due to owner-caused delay, that its sole remedy will be an extension of time.
NDFD clauses are controversial. They produce harsh results for contractors and evoke the law’s aversion to clauses that exculpate parties from their own negligence. Some states have statutes that bar these clauses. Yet, largely because of the policy favoring freedom of contract, especially in transactions between sophisticated parties, most states treat them as valid, enforceable and not offensive to public policy.
Connecticut became one of those states in 1991. In White Oak Corporation v. Department of Transportation, 217 Conn, 281 (1991), without discussing any public policy concerns, our Supreme Court accepted the trial court’s conclusion that the clauses are valid and enforceable and adopted the four exceptions to enforceability the New York Court of Appeals had recognized in Corinno Civetta Construction Corporation v. New York, 493 N.E.2d 905 (1986). NDFD clauses will not be enforced (1) if the delay is caused by the owner’s bad faith or its willful, malicious or grossly negligent conduct; (2) where the delay was not contemplated; (3) where the delay is so unreasonable as to constitute an abandonment of the contract by the owner; and (4) for delays resulting from the owner’s breach of a fundamental obligation of the contract.
The plaintiff in White Rock claimed the benefit of the first exception. Instead of discussing what bad faith and gross negligence meant, the Court simply denied the plaintiff’s claim because it was based on a contract provision the plaintiff misread. The plaintiff also argued for the second exception. The Court did explain what this exception requires – that the delay be unforeseeable. It then rejected the plaintiff’s claim to this exception because the NDFD clause itself demonstrated that the delay was foreseeable and contemplated.
White Oak did not present the Court with an occasion to explain the first exception or to discuss the third and the fourth exceptions. Indeed, until August 5, 2012, there were no additional appellate decisions in Connecticut on NDFD clauses and the exceptions to their enforceability. That day the Supreme Court decided C&H Electric, Inc. v. Town of Bethel, 312 Conn. 843 (2012). This article discusses what that case adds to this important area of state construction law.
Unlike White Oak, the specific language of the NDFD clause played a major role in C&H Electric. In that case, a trade contractor sued the municipal owner on a school additions and renovations project claiming lost productivity. The owner raised the NDFD clause successfully in defense. The language of the clause posed a difficult question of contract interpretation for the Court, the resolution of which proved ultimately to be central to its reasoning even though it did not have to be. The way the language defined the clause’s scope and how it anticipated exception claims was also key to the Court’s conclusion that the clause barred the plaintiff’s claim.
The clause was stunningly broad. It made an extension of time the plaintiff’s sole remedy for “any delay in the commencement, prosecution or completion of the work,” and for “any hindrance or obstruction in the performance of the work,” “any loss of productivity or other similar claims.” A time extension would be the sole remedy even if the delays were “foreseeable, contemplated, or uncontemplated.”
The clause contained a single exception: a time extension would not be the sole remedy if the delay were “caused by the acts of the Owner constituting active interference with [the plaintiff’s] performance of the Work, and only to the extent such acts continue after the [plaintiff] furnishes the Owner with written notice of such interference.” The contract did not define “active interference,” but the clause broadly described the conduct that would not qualify. “The Owner’s exercise of any of its rights or remedies under the Contract Documents, including, without limitation, ordering changes in the Work, or directing suspension, rescheduling or correction of the work, regardless of the extent or frequency of the Owner’s exercise of such rights or remedies, shall not be construed as active interference.”
In addition, despite the language making a time extension the sole remedy even for uncontemplated delays, the clause concluded by specifying “areas of delay” that were expressly contemplated. They included delays caused by change orders and by the failure of trade contractors to perform.
The parties stipulated that the clause was drafted by a lawyer for the Town’s original construction manager and that it was his attempt to displace the common law exceptions in favor of a single contractual exception – active interference by the owner. The plaintiff claimed that the Town was guilty of active interference. The Town denied the charge. The Supreme Court could have avoided construing “active interference” by concluding, as it did, that the plaintiff mischaracterized one of the acts or omissions it was challenging and that the rest of the conduct the plaintiff attacked came within one of the categories specifically excluded from “active interference.” It also could have avoided defining “active interference” and affirmed the trial court’s judgment simply by relying on the plaintiff’s failure to give the notice the NDFD clause required. It choose, nevertheless, to construe the term.
Both parties agreed that the drafter’s intent in making “active interference” an exception was to capture conduct that NDFD cases across the country had classified as “active interference.” Many jurisdictions use that term to describe one of their judicially created exceptions. Nevertheless, the meaning courts ascribe to the term varies from jurisdiction to jurisdiction. Some courts define it to reflect the first White Oak exception, requiring bad faith or willful, malicious conduct. Others use less egregious conduct in their definition, requiring only some affirmative, willful act that unreasonably interferes with the contractor’s performance. Complicating the matter further was a New York case, Kalisch-Jarcho, Inc. v. New York, 58 N.Y.2d 377 (1983), in which the court had occasion to describe “active interference” as requiring only some affirmative, willful act that unreasonably interferes with the contractor’s performance, but noting that “mere” active interference by the owner is not an exception to NDFD enforceability in New York, that much more egregious conduct is required.
The Court agreed with the defendant that “active interference” was ambiguous and that extrinsic evidence could be considered to establish its meaning. 312 Conn. at 855-6. The defendant pointed to the entire NDFD clause, noting its breadth, the specific list of owner actions it expressly excluded from “active interference,” and the draftsman’s situation (his clients were owners), insisting that these factors showed that the draftsman was looking to the common law for an exception that would afford maximum protection to the owner, be difficult for contractors to invoke, but repel any public policy challenge, and that this augured in favor of the more restrictive definition. The Court refused to draw this conclusion. It characterized the defendant’s argument as an invitation to speculate about the draftsman’s intent. 312 Conn. at 860. Further, even if the draftsman had the intent the defendant posited, the Court deemed his “subjective intent” irrelevant. Id. To prevail with its argument, the defendant had to produce evidence that the draftsman “objectively manifested or explained to the other party what he intended ‘active interference’ to mean. Id.
Given its view of the evidence required, the Court concluded that it was “left with [only] the language of the contract, and the [various] judicial interpretation to guide [its] inquiry.” 312 Conn. at 856. It then reasoned that the word “active,” when modifying “interference, does not connote bad faith or malicious intent, but something done willfully or with purpose, as opposed to passively or mistakenly. “But we also conclude, as have virtually all other courts . . . that [“active interference”] demands something greater than ordinary negligence or passive omission, that is, conduct more affirmative and willful than a ‘simple mistake, error in judgment, lack of total effort, or lack of complete diligence.” 312 Conn. at 858. Nevertheless, important in construing “active interference” here was the list of owner actions that could not be deemed “active interference” within the meaning of this contract, as well as the list of delays the contract deemed foreseeable. Generalizing from these lists, the Court wrote that the owner’s conduct must be truly unreasonable to expose the owner to liability, that ordinary construction delays, particularly those that were reasonably foreseeable at the time of contracting would not amount to “active interference” in this contract. 312 Conn. at 843.
The Court then turned to the conduct the plaintiff claimed to be “active interference” and measured it against this standard. The plaintiff first claimed that the owner directed the plaintiff to proceed with its work despite its knowledge of delay-causing conditions (asbestos that would have to be abated) and its concealment of those conditions. The Court agreed that conduct of this sort would satisfy the standard, but held that the evidence failed to support the plaintiff’s claim. 312 Conn. at 863-4. The plaintiff also claimed that the owner committed active interference by failing properly to coordinate the work of its contractors and by neglecting to update the specifications to show the location of asbestos and the timing of its abatement. Once again, the Court concluded that the plaintiff failed to prove its charge. 312 Conn. 864-6. It also reasoned that even if the owner had done what the plaintiff claimed, the conduct came within the categories the NDFD clause excluded from “active interference,” and that the need to remove additional asbestos was a known, anticipated risk. Id. That the plaintiff failed to prove that the conduct in question unreasonably interfered with its work was further support for the Court’s conclusion. 312 Conn. at 866-7.
Both the Supreme Court and the trial court failed to consider the owner’s claim that the clause displaced the common law exceptions in favor of a single, contractual “active interference” exception. Neither court explained its action in this regard. Fortunately, the failure to consider this claim presented the Court with an opportunity to rule on the plaintiff’s argument that the first and fourth White Oak exceptions applied here and to discuss what they mean.
As to the first exception (bad faith, etc.), the plaintiff reasserted its charge that the owner directed it to proceed despite knowledge of delay-causing conditions. Having already concluded that the evidence refuted the charge, the Court went further, holding that bad faith requires misconduct that “smacks of intentional wrongdoing, while gross negligence requires conduct that “betokens a reckless indifference to the rights of others.” 312 Conn. at 869.
As to the second exception (breach of a fundamental obligation), the Court explained that the obligation must be “truly” fundamental, that the exception applies in “an especially narrow range of circumstances.” 312 Conn. at 870-1. It does not apply to “ordinary, garden variety” obligations. Id. It applies typically to situations where the owner has “failed in its obligation to obtain title to the site or make it available to the contractor so that it may commence construction . . . .” Id. To trigger the “breach of a fundamental obligation” exception, the conduct must also have a “meaningful impact on the plaintiff’s work.” Id.
The plaintiff maintained that the owner prevented it from accessing the site due to the need to abate asbestos. The Court refused to disturb the trial court’s finding that the plaintiff always had access to the site. While the plaintiff was not always able to work where it originally planned, but had to move its operations from location to location on the site to accommodate ongoing asbestos abatement, was not a failure to make the site available.
The plaintiff further argued that the owner breached a fundamental obligation by failing to disclose and update the plans to reflect the asbestos abatement work. Instead of determining whether the owner was so obliged and if so, whether the obligation was fundamental, the Court cited the trial court’s unchallenged finding that the asbestos work had little impact on the plaintiff’s productivity, that the plaintiff was most productive during the period at issue and that the job finished on time. 312 Conn. at 870-1.
C&H Electric is an important addition to Connecticut’s NDFD law, but much remains to be resolved. Neither White Oak, nor C&H Electric discuss the exception for delays so unreasonable as to constitute an abandonment of the contract. While the standards now developed for the bad faith and breach of fundamental obligation exceptions are easy to recite, they are difficult to apply to a given set of facts. And our appellate courts have not been presented with a sufficient variety of conduct alleged to come within these exceptions so as to be in a position to fashion a more comprehensive body of law. It also remains open whether parties can contractually exclude the common law exceptions and if so, what it would take to do so.
Richard C. Robinson practices in the area of business litigation, including the litigation of construction and employment disputes at Pullman & Comley, LLC. Rick heads the firm’s Construction Law and Litigation Section. Reprinted with permission from the November 10th issue of Connecticut Law Tribune. ©2014 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.