District Court in New York Finds Evidence Sufficient to Support Waiver of Written Change Order Requirement and Bad Faith Exception to Enforceability of “No Damage for Delay” Clause in Subcontractor Miller Act Suit

United States of America, for the Use and Benefit of Evergreen Pipeline Construction Co., Inc. v. Me,
No. 90 Civ. 5106, 890 F. Supp. 1213, 1995 U.S. Dist. LEXIS 9385 (S.D.N.Y. July 7, 1995)

Oral Requests for Extra Work – Under New York law, either oral directions to perform extra work, or a general course of dealing may effectuate a waiver or modification of contract provisions which otherwise expressly require written authorization or notice of such extra work claims. No Damage for Delay – Under New York law, an exculpatory “no damage for delay” clause will not be enforced where the delay was: 1) not contemplated by the parties 2) caused by the contractor’s bad faith, or willful, malicious, or grossly negligent conduct; 3) so unreasonable that it constituted an intentional abandonment of the contract; or, 4) the result of a fundamental breach of the contract by the contractor. Punitive Damages – Punitive damages on purely contractual claim will not be awarded where there is insufficient evidence for a jury to conclude that public rights were implicated or that objectionable conduct was directed at the public generally. Prejudgment Interest – Subcontractor is entitled to prejudgment interest for services rendered seven years before judgment was entered. Rule 11 Sanctions – Defendants’ assertion of a civil RICO counterclaim without sufficient basis therefor warrants imposition of sanctions under Rule 11. Attorney’s fees awarded as a Rule 11 sanction is a matter committed solely to the discretion of the district court. In ascertaining “reasonable” fees, the court must bear in mind that the principrned a verdict in favor of subcontractor Evergreen and found that Merritt materially breached the subcontract and that certain provisions regarding extra work and delay damages were either waived or eliminated by the parties. Merritt filed various post trial motions challenging the jury’s verdict regarding: the oral requests for extra work under a contract which required that all such requests be in writing; the award of delay damages under a contract with an express “no damage for delay” provision; and challenging the propriety of permitting a claim for punitive damages to be submitted to the jury. Evergreen also filed various post trial motions seeking prejudgment interest and attorney’s fees incurred in defending baseless civil RICO claims.

The court held that adequate evidentiary basis was established from which a reasonable jury could conclude that defendant Merritt through its prior course of conduct had waived the contractual “in writing” requirement for the change orders and extra work it orally directed Evergreen to perform. The court further found that there was sufficient basis for the jury to conclude that Merritt also waived the “no damage for delay” provision through its bad faith and malicious conduct in grossly inflating backcharges, spoon feeding progress payments to Evergreen and refusing to provide surveyors as promised. As to the punitive damages claim, the court found that a new trial was not warranted in light of the court’s refusal to dismiss the punitive damages claim before trial despite the fact that the court ultimately concluded that public rights were not implicated sufficient to warrant said punitive damages. The court reasoned that evidence of bad faith were relevant to other issues in the trial and evidence that was relevant only to a punitive damages claim were expressly excluded from the jury.

As to plaintiff’s post-trial motions, the court found that subcontractor Evergreen was entitled to prejudgment interest as an “element of complete compensation” pursuant to Supreme Court precedent recognizing the time value of money. The court further found that Defendants’ assertion of a civil RICO counterclaim without sufficient basis warranted imposition of sanctions under Rule 11. However the court noted in ascertaining the appropriate sanction, the court must bear in mind that the principal objective of Rule 11 sanctions is to curb baseless filings; they are not to be used a fee-shifting mechanism.

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