Surety Case Law Note: You May Need To Waive Goodbye To That Waiver Defense
September 13, 2022
In this Surety Today blog post we will provide a Case Law Note to consider the issue of the permissibility of no damage for delay clauses in Miller Act payment bond claims. The Court wrangles with the issue of the anti-waiver provision of the Miller Act and the exception to no damage for delay clauses for unreasonable delays that were beyond the contemplation of the parties. Read on to learn more about no damage for delay clauses.
TRI-STATE ELECTRIC V. WESTERN SURETY COMPANY, 2017 WL 123426 (1/11/17 D. Idaho)
This case explores the issue of waiver under the Miller Act. The Court addressed a sub-subcontractor’s claim for delay damages against a Miller Act payment bond. The Project involved an electrical system upgrade at the Boise, Idaho Veterans Administration Medical Center. The General Contractor was bonded by Western Surety. The bonded principal entered into a subcontract with Apex Enterprises to replace certain electrical switchgear and Apex in turn entered into a Sub-Subcontract with TriState Electric to perform part of the Subcontract work. The Project experienced significant delays and a wide variety of disputes arose between the parties, but the dispute I would like to focus on for the purpose of this discussion relates to a damage limitation argument that was asserted by Western.
Western pointed to a provision in the Apex/TriState Sub-Subcontract commonly referred to as a “No Damage for Delay Clause,” which provided that:
The Contractor shall not be liable to the Subcontractor for any damages or additional compensation as a consequence of delays caused by others unless the Contractor has first recovered for such damages on behalf of the Subcontractor. … The Subcontractor’s sole and exclusive remedy for delay shall be an extension in the time for performance of the Subcontractor’s work.
That is a fairly standard provision you see in subcontracts and typically they are upheld, while there are some jurisdictions that don’t enforce such provisions and some that do. In response to Western’s arguments, Tri-State asserted that the damage limitations provisions were impermissible waivers under the Miller Act and such provisions were therefore void.
Miller Act Waiver Prohibition
The waiver that Tri-State was referring to was relatively recently added to the Miller Act. In 1999 Congress amended the Miller Act to include a provision specifying the requirements for a valid waiver of Miller Act rights. The provision at 40 U.S.C. §3133(c) provides: A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is: (1) In writing (2) Signed by the person whose right is waived and (3) Executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.
The Tri-State Court denied Western Surety’s motion for summary judgment based on the “No Damage for Delay Clause” finding that such provision violated the Miller Act waiver prohibition and was held that the provision was void because the damage limitation was entered into before any work was performed. The Court found that the “No Damage for Delay Clause” effectively amounted to a waiver of the claimant’s rights to bring an action on the payment bond. See also U.S. v. Safeco Ins. Co. of Am., 2013 WL 5970435 (W.D. Kentucky 2013).
A good argument can be made that the Court got this one wrong. Let’s look at some basics: The Miller Act provides for the recovery of “sums that are justly due.” In general, the surety’s liability on a payment bond is defined by the liability of the underlying contract. Thus, it has been held that the surety on a Miller Act payment bond is liable only to the extent that the bonded principal would be liable. For this reason, the surety may avail itself of the contract defenses available to the bonded principal. The well recognized purpose of the Miller Act is to ensure that subcontractors are promptly paid for their work on federal construction projects.
Other courts that have addressed the “No Damage for Delay Clause” have made the distinction between clauses that affect the “timing of recovery” with clauses that affect the “measure of recovery.” These courts have held that “No Damage for Delay clauses” only affect the measure of recovery and not the timing, and, as such, are not contradictory to the Miller Act and are valid and enforceable provisions. See: U.S. ex rel. Kogok Corp. v. Travelers Cas. & Surety Co. of America, 55 F. Supp. 3d 852, 860 (N.D. W. Va. 2014); Morganti Nat’l, Inc. v. Petri Mech. Co., Inc., 2004 WL 1091743 (D. Conn. May 13, 2004); Chasney & Co. v. Hartford Acc. & Indemn., 2015 WL 3887792 (D. Md. June 22, 2015). The Court in Morganti observed that “[t]he “no damages for delay” clause, is one that affects the measure of damages, i.e., whether there is any liability for monetary damages. It simply delineates the extent of the general contractor’s liability or, in the context of the Miller Act, what sums are ‘justly due’ to the subcontractor. Accordingly, the ‘no damages for delay’ clause just as much defines the liability of [surety] as it does the liability of [the bonded principal], and so, both parties are entitled to raise this clause in their defense.”
No Damage For Delay Clause Unenforceable For Unreasonable Delays
Tri-State also argues that the no damage for delay clause is unenforceable without regard to the Miller Act prohibition against certain waivers. Tri-State argued that no damage for delay clauses were unenforceable when the delays amount to an abandonment of the project, or are unreasonably lengthy and beyond the contemplation of the parties. Citing Hawley v. Orange Cnty. Flood Control Dist., 27 Cal. Rptr. 478 (Cal. App. Ct. 1963); Jensen Const. Co. v. Dallas Cnty., 920 S.W.2d 761 (Tx. App. Ct. 1996)). In this case, the project was intended to be performed in 240 days. Instead, the project took more than 950 days to perform.
The Tri-State Court noted that a majority of jurisdictions have adopted certain exceptions to the enforceability of no damage for delay clauses. These exceptions include: (1) delays so unreasonable in length as to amount to project abandonment; (2) delays caused by the other party’s fraud, misrepresentations, concealment or other bad faith; and (3) delays caused by the other party’s active interference. See J.A. Jones Constr. Co. v. Lehrer McGovern Bovis, Inc., 89 P.3d 1009, 1015 (Nev. 2004). Courts are largely divided on whether no damage for delay clauses are unenforceable where delays are beyond the contemplation of the parties at the time they entered into the contract. Compare Corinno Civetta Constr. v. City of New York, 502 N.Y.S. 2d 681, 686 (N.Y. App. 1986) (“It can hardly be presumed … that the contractor bargained away his right to bring a claim for damages resulting from delays which the parties did not contemplate at the time.”) with John E. Gregory & Son, Inc. v. Guenther & Sons Co., Inc., 432 N.W.2d 584, 587 (Wis. 1988) (“[T]he adoption of a ‘no damage for delay’ clause shows that the parties realize that some delays cannot be contemplated at the time of the drafting of the contract. The parties include the clause in the contract in order to resolve problems conclusively should such delays occur.”); see also Hawley, 27 Cal.Rptr. at 481-483 (collecting cases).
Several federal cases have rejected the notion that no damage for delay clauses provide absolute immunity for damages where delay is exceptionally unreasonable. See, e.g., Ross Eng’g Co. v. U.S., 92 Ct.Cl. 253, 261 (Ct. Cl. 1940) (plaintiff entitled to recover damages incurred due to unreasonable delay of 70 days between contract execution and issuance of notice to proceed); F.H. McGraw & Co. v. U.S., 130 F.Supp. 394, 398 (Ct. Cl. 1966) (delay of 159 days in authorizing changes to specifications was unreasonable and U.S. would be held liable in damages to contractor for delay over a month); American Pipe & Constr. Co. v. Westchester Cnty., 292 F. 941, 952 (2d Cir. 1923) (contractor entitled to damages for unreasonable delay in excess of three months); Berger Enter. v. Zurich Am. Ins. Co., 845 F.Supp.2d 809, 821(E.D. Mich. 2012) (under Ohio law, no damage for delay provision was unenforceable where delay was not at all contemplated by the parties). Ultimately, the Tri-State Court held that issue was for the trier of fact and summary judgment was denied.
The takeaway from this case is that the surety may not be able to rely on all of the underlying contractual defenses in the bonded contract if those defenses conflict with the requirements of the Miller Act such that they constitute an impermissible waiver. Further, unreasonable delays may not be subject to a no damage for delay clause.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.