“No Damage for Delay” Clause Does Not Preclude Delay Damages Caused Solely by Owner’s Failure to Disclose Material Information Related to Potential Delays

Howard Contracting, Inc. v. G.A. MacDonald Constr. Co., 71 Cal. App. 4th 38 (1999)

This case arose out of a public works contract relating to a construction project to rehabilitate the Venice Canals located in Los Angeles.  The project was owned and designed by the City of Los Angeles, which awarded the general contract to G.A. MacDonald Construction Co., Inc.  The contract between the City and MacDonald contained a limited “no damage for delay” clause, which stated that a contractor was entitled to an extension of time to complete work delayed by unforeseen events but was not entitled to collect damages attributable to the delay.  The contract did provide an exception, however, which specifically provided for payment for unreasonable and unanticipated delays caused by the City.  MacDonald subcontracted portions of the work to Howard Contracting and Soil Retention Systems (“SRS”).

The project was significantly delayed when the City failed to obtain necessary permits from various regulatory agencies.  Howard initiated litigation by filing a complaint against MacDonald and the City to recover damages for delay and disruption.  MacDonald cross-complained against both Howard and the City, filing claims against the City for breach of contract, breach of implied warranty and changed conditions.  The case was handled by a judicial referee.

The referee found that the City failed to disclose material information to MacDonald and its subcontractors concerning project restrictions and difficulties, failed to timely obtain construction permits from regulatory agencies and failed to provide access to the work site.  The referee determined that the City’s acts and omissions constituted breaches of the contract, the implied warranty of correctness of plans and specification and the implied warranty of cooperation.  As a result of the breaches, the referee concluded MacDonald and Howard sustained damages of $1.2 million, plus interest.  The statement of decision, however, specifically determined SRS was not entitled to recover damages on the pass-through claim asserted on its behalf by MacDonald.

A trial court entered judgment in accordance with the referee’s findings.  The City appealed, arguing that that it was immune from liability and that MacDonald and Howard had failed to prove delay damages.  SRS appealed the trial court’s denial of SRS’s motion to vacate the judgment, based on the grounds that the judgment precluded SRS’s recovery of delay damages on a pass-through basis.

The court of appeals found that the “no damage for delay” clause was inapplicable in the face of the City’s breaches of contract and the implied covenant to disclose known restrictions on performance of the project.  The court of appeals also found that the City was not immune to a claim for delay damages.  Additionally, the court of appeals rejected the City’s argument that SRS lacked standing, as a subcontractor seeking pass-through damages, to appeal the trial court’s decision to deny its motion to vacate.  The court of appeals ultimately determined that SRS’s pass-through claim was valid, and that the trial court had erred in dismissing the motion to vacate.  The trial court judgment in favor of MacDonald was affirmed and a new trial was ordered to determine whether SRS was entitled to pass-through damages.