US District Court in Michigan Holds No Damages for Delay Provision in Subcontract to be Performed in Georgia Unenforceable Under Ohio Statute Where Choice of Law Provision Specified Application of Ohio Law

Acme Contracting, Ltd. v. TolTest, Inc
2008 U.S. Dist. LEXIS 36355 (E.D. Mich. May 5, 2008)

The United States District Court for the Eastern District of Michigan recently had to interpret an Ohio statute (O.R.C. §4113.62) which statute dealt with the enforceability of no damages for delay provisions in construction contracts. Relying on prior cases interpreting the applicable statute, the District Court found that the subcontract which limited delay claims to a time extension only was prohibited under the statute and, therefore, void and unenforceable. Although the District Court permitted the subcontractor to recover delay damages, it also concluded that the subcontractor had not proven that it was entitled to extended home office overhead costs using the Eichleay formula and refused to award such damages.

Acme Contracting, Ltd. (Acme) served as a subcontractor to a contractor, TolTest, Inc. (TolTest), on a construction project in Atlanta, Georgia (the Project) pursuant to a series of subcontract agreements. TolTest performed remediation and abatement work while Acme provided demolition services. According to a work schedule prepared by TolTest, Acme’s ability to complete its demolition work was contingent on TolTest completing its abatement work. Throughout the various phases of the Project, TolTest caused multiple delays to Acme’s work. The delays resulted in Acme completing its work 72 days later than expected.

As a result of TolTest’s refusal to (1) pay sums sought by Acme under its last three properly submitted payment applications, (2) pay additional amounts due and owing to Acme under a time and materials (“T&M”) arrangement, and (3) reimburse Acme for its delay damages, Acme sued TolTest under theories of account stated, breach of contract, and quantum meruit. After a bench trial, the District Court issued findings of fact and conclusions of law and rendered judgment.

First, the District Court determined that TolTest was liable to Acme on the account stated claim because TolTest never disputed the amounts sought by Acme under the three unpaid payment applications. The District Court concluded that TolTest’s refusal to pay where the appropriate lien releases were provided by Acme and where TolTest received payment in full from the general contractor was improper. Judgment in the total amount of the unpaid payment applications was rendered in Acme’s favor.

Second, the District Court held that TolTest was liable to Acme on the quantum meruit claim because TolTest directed Acme to perform additional work on a T&M basis. Additionally, TolTest received daily reports detailing the additional work and TolTest clearly benefited from the additional work performed. Judgment in the amount of the additional work was entered in Acme’s favor.

Third, the District Court held that TolTest was liable to Acme for delay damages. As an initial matter, the District Court indicated that Ohio law applied by virtue of a choice of law provision in the subcontracts. Examining an Ohio statute, the District Court explained that Ohio prohibits provisions in construction subcontracts which purport to waive or preclude liability for delay damages where the delay was caused by the owner’s or contractor’s actions or inaction. The District Court concluded that the contracts at issue contained such limiting provisions which rendered the bar against delay damages void. Specifically, the contracts at issue provided that a time extension was the “sole and exclusive remedy” to Acme for delay. The contracts further provided that any claim for delay costs was limited to a situation where the delay was more than four months in length. Relying on a recent Ohio Appellate Division holding, the District Court held that the contract provisions limiting Acme’s entitlement to delay damages were void and unenforceable because the evidence proved that the delay was in fact caused by the contractor, TolTest.

Having determined that Acme was entitled to seek delay damages, the District Court next considered the nature of the delay damages to which Acme was entitled. Although the District Court awarded damages for the delay caused by TolTest during the two phases of the Project, the District Court denied a portion of Acme’s claim which sought unabsorbed home office expenses. Acme had calculated its unabsorbed home office expenses using the Eichleay formula. The District Court explained that such a claim under the Eichleay formula required a two step inquiry: first, was Acme on “standby” and required to be able to immediately resume the work at any time during the delay period? Second, was Acme able to secure and perform additional work while on standby? Given the fact that Acme could and did perform additional work on a T&M basis during various delay periods, the District Court concluded that Acme was not entirely in standby mode and was able to perform other work during those periods. Accordingly, Acme’s claim for overhead damages was denied.

This entry was posted in Payment dispute, Subcontract and tagged , , , , . Bookmark the permalink.