Missouri Court of Appeals Reverses Trial Court Decision That Subcontractor Could Claim Damages From a General Contractor Despite a “No Damages for Delay” Provision in the Subcontract Agreement

Roy A. Elam Masonry, Inc. v. Fru-Con Construction Corporation,
1996 Mo. App. LEXIS 481 (March 26, 1996).

On November 14, 1988, the general contractor, Fru-Con Construction Corp. (Fru-Con) entered into a construction contract with Southwestern Redevelopment Corp (SRC), the owner. In early 1989, Fru-Con and a subcontractor Roy A. Elam Masonry (Elam) entered into a subcontract for masonry work to commence September 1, 1989 with a completion date of July 1, 1990.

The terms of the General Contract were incorporated into the subcontract; however, the Subcontract also provided; “In the event of conflict between the contract documents and this subcontract, the provisions of this subcontract shall govern.” And included Article 3(c):

“Should Subcontractor be delayed by any act or omission of Contractor … or by any other cause beyond Subcontractor’s control and if the cause of delay is not due to any act or omission of Subcontractor, Subcontractor shall be entitled to request a reasonable extension of time … No payment of any kind, for compensation, or for damages, or otherwise, shall be made to Subcontractor … unless Owner is obligated to pay Contractor compensation or damages …”

Fru-Con encountered various problems prior to September 1, 1989, which greatly delayed the start of the subcontract. These schedule extensions resulted in Elam not beginning its work under the subcontract until November 1, 1990 – a delay of 14 months.

In March 1991, Elam sent to Fru-Con a “formal request for an equitable adjustment to our contract … based on the delay in the project that has caused us to incur unanticipated costs”. Fru-Con replied to Elam by informing them that their claim had been forwarded to SRC, and directed Elam to the terms of the subcontract.

In August 1991, Elam asserted that they were entitled to compensation due to the 14 month delay which was beyond Elam’s control, unreasonable in duration, and were beyond the contemplation of the parties. Elam stated that there was a significant body of case law (from jurisdictions outside of Missouri) indicating that under these conditions, a “no damages for delay” clause is legally unenforceable.

On July 23, 1992, Elam filed suit against Fru-Con for breach of contract requesting damages for costs caused by delay. Fru-Con answered by saying their damages was precluded by the subcontract. On August 3, 1992, Fru-Con filed a petition against SRC seeking damages (including Elam’s claim).

The trial court directed the jury that the issue raised by subcontract clause 3(c) was withdrawn from the case and should not be considered. Fru-Con appealed alleging that the trial court erred in removing Article 3(c) from the jury’s consideration. The Court of Appeals of Missouri agreed with Fru-Con’s contention, stating that the record showed that Fru-Con included Elam’s claim for damages in it own claim against SRC, which was still pending. Elam’s action was, at best, premature.

The Court of Appeals noted Article 3(c) was not, in fact, a “no damage for delay” clause at all. Elam was not absolutely barred from seeking damages for delay, but could recover, through Fru-Con, its share of those delay damages for which SRC is liable. Elam’s right to recover delay damages was, and is, contingent upon the success of Fru-Con’s pending action against SRC.

The court saw no reason why this unambiguous provision could not be enforced as written. The subcontract was agreed to by two experienced commercial entities, in equal bargaining positions. Its terms were readily ascertainable, and applied to all delays, regardless of whether the delay was contemplated or reasonably foreseeable by the parties. Elam could still recover delay damages if SRC were obligated to Fru-Con for the same; its right to seek such damages has not been extinguished. Therefore, the judgment of the trial court was reversed and the cause was remanded for dismissal of Elam’s action as premature.

Court of Appeals for Federal Circuit Holds That Government Did Not Waive Right to Terminate for Default Notwithstanding Contractor’s Continued Performance After Contract Completion Date, Where Contractor Continued to Delay Not Despite Numerous Efforts by Government to Spur Completion

State of Florida, Department of Insurance v. The United States,
81 F.3d 1093 (U.S. App. 1996) LEXIS (Fed. Cir. 1996).

The construction contract at issue in this case resulted in a default termination of the contractor and the contractor’s surety. The surety’s receiver sued the United States for damages based on losses suffered by the surety in connection with the project.

In October 1987, the Padula Construction Company (the general contractor) contracted with the Postal Service (the owner) to build a post-office in Florida. Padula failed to perform in accordance with the contract and the Post Office eventually terminated the contract for default in October 1988. Pursuant to the performance bond agreement, Southeastern Casualty + Indemnity Insurance Company (Southeastern) undertook to finish the building work promising to use best efforts to complete it within the terms of the original contract. Southeastern did not meet the deadline that they had initially given to the Postal Service and during the following 4 months continued to do little or no work, and would not respond to the Postal Services repeated complaints and requests for a project schedule. Southeastern were informed that liquidated damages under the contract for the delay were accruing, and yet they still did nothing about trying to complete the project on time.

Southeastern eventually hired a new contractor to complete the building who provided a project schedule giving August 1989 as the completion date. Despite repeated warnings of potential structural damage to the building, site inspection visits in March 1989 showed that work was not in progress and the roof was still incomplete. The Postal Service met with Southeastern in April to discuss termination for default, and Southeastern informed them that they were under no obligation to advise them of progress and suggested that possible corrective work could mean that the August completion date would be postponed.

On May 12, 1989, the Postal Service terminated Southeastern for default because of its failure to make progress, subsequently, a Florida court deemed Southeastern insolvent and a receiver was appointed. The receiver filed suit for over $400,000 declaring that improper progress payments to Padula were made and money was owed to Southeastern for funds expended after it took over the project.

The receiver argued that the Postal Service waived its right to terminate Southeastern, because it failed to set a deadline for completion after the original date had passed, therefore, leading Southeastern to believe that time was no longer of the essence and induced Southeastern to undertake substantial efforts to complete the contract.

Some of the leading cases in this subject area have demonstrated that a waiver of the government’s right to terminate a contract for default may be found when the government allows “a delinquent contractor to continue performance past a due date” and a new deadline for performance must be set so that the parties will understand when performance is required. The trial court found this doctrine to be inapplicable in this present case and this was affirmed by the Court of Appeals for the Federal Circuit.

On many occasions after Padula’s termination, the Postal Service reminded Southeastern of the accruing liquidated damages, and they also made clear to Southeastern that existing contract provisions had not been altered and must be adhered to. The Postal Service made numerous efforts to spur Southeastern to action. For these reasons, Southeastern could not reasonably have believed that time was not of the essence or that its previous periods of delay had been excused. The trial court also found that all of Southeastern’s efforts between October 1988 and May 1989 advanced the project by no more than 10%.

The Court of Appeal therefore agreed with the trial court that the Postal Service acted within its rights in terminating Southeastern’s right to proceed.

Commonwealth Court of Pennsylvania Holds Owner’s Professional Malpractice Claim Against Design Professional Outside Scope of Arbitration Agreement Covering Claims Arising Out of Agreement

Hazleton Area School District v. Bosak,
671 A.2d 277 (Pa. Cmwlth. 1996).

In this case, neither of the arbitration provisions provided in the 1988 and 1989 agreements specifically stated that an action in tort for negligence should be arbitrated. The Commonwealth Court affirmed the decision of the trial court and held that the complaint alleged professional negligence and not breach of agreement and thus was not subject to arbitration provisions of agreements with the school district. 

In September 1988, a written agreement (“1988 agreement”) was entered into between the School District and RBA (sole proprietorship owned by Robert A. Busak) for the design, engineering and construction of a new high school. Subsequent to this, the School District entered into another agreement (“1989 agreement”) covering the same services but including a third party. Both agreements included arbitration provisions.

The School District began occupying the completed high school in September 1993, and in January 1994, the roof of the new school collapsed under the weight of snow. In July 1994, the School District filed a complaint with the trial court seeking damages for the collapsed roof.

In its complaint, the School District sought non-contract damages from the defendants (the architect and engineer individually and his sole proprietorship). In August 1994, Bosak filed preliminary objections stating that he never undertook to perform services in his individual capacity, and RBA filed a petition to compel arbitration pursuant to Section 501(a) Uniform Arbitration Act. Both of these objections were denied by the trial court and subsequently the defendants appealed to the Commonwealth Court.

The court held that a tort claim for professional negligence was not included in the terms of the 1988 or 1989 agreements and did not constitute the basis of consideration for either agreement.

The Pennsylvania Supreme Court has stated that judicial inquiry as to whether arbitration is appropriate is limited to the following questions; (1) whether an agreement to arbitrate was entered into; and (2) whether the involved dispute comes within the ambit of an arbitration provision.

In this case, the arbitration provision in the 1988 agreement stated that claims or disputes arising out of, or relating to, the agreement, or its breach, shall be decided by arbitration. Similarly, the arbitration provision in the 1989 agreement stated that any dispute concerning the subject matter of the agreement shall be referred to the American Arbitration Association (AAA). The School District in its complaint did not assert claims concerning the agreement or their breach, and, RBA did not file any request for arbitration with the AAA.

When construing arbitration provisions the Supreme Court states that because arbitration is a matter of contract, the courts must resort to the rules of contractual construction with the intent of the parties being of paramount importance. The Supreme Court also states that care must be taken not to extend an arbitration agreement by implication beyond the clear, express and unequivocal intent of the parties as manifested by the writing itself.

The policy consideration underlying contract law is protection of expectations which had been bargained for by the parties to a contract. It is necessary to determine whether losses incurred by a party were contemplated by the parties at the time that the contract was executed. It does not appear that any of the parties contemplated the possibility of repairs to the new roof. In contrast tort claims must show that losses resulted from injury to persons or property and damages are recoverable if harm is shown above and beyond disappointed expectations. The School District alleged harm above and beyond disappointed expectations and accordingly their claims constituted a tort action rather than one for breach of contract.

In some situations, arbitration provisions in a contract may, in fact, cover tort actions for negligence where the contract provides that “should either party to this Contract suffer damage in any manner because of the wrongful act or neglect of the other party … claims … shall be adjusted by agreement or arbitration.” The Supreme Court has ruled that this language is completely inclusive and means all claims.

In this present case, the arbitration provisions in the agreements specify that disputes concerning the agreements are to be resolved through arbitration. However, the arbitration provisions do not encompass tort claims, therefore, the trial court’s decision is affirmed.