Second Circuit Holds Corinno Civetta Exceptions to “No Damage for Delay” Clauses Inapplicable to UCC Exclusion of Consequential Damages

McNally Wellman Company v. New York State Electric & Gas Corporation,
1995 U.S. App. LEXIS 23312 (2d Cir. August 18, 1995)

Exclusion of Consequential Damages – A no-damage-for-delay clause insulated a construction supplier from liability for delays in delivery of six spillway gates on a dam project. The application of the UCC prevented the project owner from invoking the common law exceptions to enforcement of a no-damage-for-delay clause.

The project owner, NYSEG, entered into a contract with McNally to supply six spillway gates on a project to refurbish a dam in New York State with each gate being 111 feet in length and weighing approximately 500,000 pounds. The contract provided that McNally would deliver the gates on specific dates but would have no responsibility for their assembly and installation. McNally entered into a subcontract with Ellwood City Iron & Wire Company (Ellwood) to fabricate the gates according to the schedule in the contract. After commencing work, Ellwood experienced both financial and labor difficulties that ultimately delayed delivery of the spillway gates to the project. McNally eventually terminated Ellwood’s subcontract after Ellwood had completed only four of the six gates and then retained a third party to complete the remaining two gates. McNally delivered the last two gates five months after the original scheduled date for delivery.

McNally filed a diversity action in the District Court after NYSEG withheld McNally’s final payment on the project. NYSEG counterclaimed for breach of contract seeking recovery of standby costs which the installation contractor incurred during the delay period and its own additional financing corm or condition of this Contract . . . . [A]ll costs related to the assembly and erection of the equipment in the field shall be deemed special, indirect, incidental or consequential and shall in no case be the responsibility of Contractor.

On appeal, the Second Circuit found that the UCC governed its review of the contract as the contract’s essential terms predominantly concerned the sale of goods. NYSEG, however, contended that the common law exceptions to enforcement of the contract’s no-damage-for-delay clause as set forth in Corinno Civetta Constr. Corp. v. City of New York, 502 N.Y.S.2d 681 (N.Y. 1986) still apply even though the UCC governed the contract. The Court disagreed finding that the UCC supplants common law when the operation of common law produces a different result than the UCC. In contrast to the four exceptions to enforcement under Corinno, 2-719(3) of the UCC which governs the exclusions of consequential damages requires enforcement unless the clause is unconscionable with no other explicit exception. As a result of this inconsistency, 2-719(3) displaced Corinno and the Court declined to review whether the Corinno exceptions applied under the circumstances in this case.

The Court went on to reject NYSEG’s arguments that the exculpatory clause failed in its purpose which rendered it unenforceable under 2-719(2) of the UCC; and that McNally both acted in bad faith and breached a fundamental obligation under the contract.

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