November 2003

On October 31, 2003, the Supreme Court of Virginia issued an opinion in Blake Construction Co., Inc./Poole & Kent v. Upper Occoquan Sewage Authority, Record No. 022075, which held that "no damages for delay" provisions in a public works contract violated the Virginia Public Procurement Act. The Supreme Court of Virginia further held that the contract's notice of claims provisions were enforceable and applied to claims involving price adjustments for work deleted from the contract.

The Virginia Public Procurement Act and the Contract Language

Section 2.2-4335(A) of the Virginia Public Procurement Act provides as follows:

Any provision contained in any public construction contract that purports to waive, release, or extinguish the rights of a contractor to recover costs or damages for unreasonable delay in performing such contract, either on his behalf or on behalf of his subcontractor if and to the extent the delay is caused by acts or omissions of the public body, its agents or employees and due to causes within their control shall be void and unenforceable as against public policy.

The contract between Blake Construction Co., Inc./Poole & Kent (the "Joint Venture") and the Upper Occoquan Sewage Authority (the "Owner") contained two provisions that purported to define the term "unreasonable delay." One provision provided as follows:

An extension of time shall be the sole remedy under the Contract for any delay caused by any reason or occurrence. The Contractor acknowledges such extension of time to be its sole remedy hereunder and agrees to make no claim for damages of any sort for delay in the performance of the Contract for any reason, including but not limited to delay occasioned by any act or failure to act of the Owner...

The second contract provision provided as follows:

Notwithstanding the foregoing, the Contractor shall be entitled to additional compensation for the actual direct costs proximately and foreseeably resulting from unreasonable delay caused by the Owner or the Engineer due to causes within their control. As a condition precedent to any entitlement to such additional compensation for unreasonable delay, the Contractor shall satisfy all Notice and submission requirements set forth in the Contract Documents for approval of any extension of Contract Time or any change in the Contract Price. The term "unreasonable delay" as used herein, shall apply only to the portion of any delay which is on the Critical Path as established by the Project Schedule in effect at the time of the asserted delay, and which is determined to be both unreasonable and not in any way the fault of the Contractor, and not to the entire duration of such delay, and which is (i) caused by the bad faith or willful, malicious or grossly negligent conduct of the Owner or the Engineer, or (ii) so severe that it Constitutes an abandonment of the Contract by the Owner, or (iii) results from a failure of the Owner to meet its payment obligations to the Contractor, to provide Owner supplied materials or Equipment, if any, or to secure permits, rights-of-way, or easements for the procurement of which the Owner is responsible and which are necessary and indispensable to the prosecution of the Work.

The Supreme Court of Virginia held that the two contract provisions were void and unenforceable. The Court determined that the contract provisions required that the unreasonable delay had to be coupled with the Owner's bad faith, malice, gross negligence or abandonment of the Contract. However, such additional requirements contradicted the specific statutory prohibition contained in Section 2.2-4335(A), and did not fit within any of the express statutory exceptions in Section 2.2-4335(B). The Court declared that any expansion or contraction of the statutory prohibition against "no damages for delay" contractual provisions found in Section 2.2-4335(A) had to come from the Virginia General Assembly. Accordingly, the Supreme Court of Virginia held that "[c]ontractual limitations on the contractor's right to damages for unreasonable delay are thus forbidden except to the extent enumerated by the General Assembly under Code S 2.2-4335(B) or other statutory enactment."

The Supreme Court of Virginia indicated that "unreasonable delay" in the context of a contract under the Virginia Public Procurement Act was to be determined under the facts and circumstances of each case. The only limitations on a contractor's ability to recover for unreasonable delay are those expressly enumerated by the Virginia General Assembly in Section 2.2-4335(A). Those limitations are two-fold: (1) the contractor must satisfy certain notice requirements, and; (2) recoverable damages are limited to those within the owner's control.

Notice Regarding Deductive Change

The Court also addressed the issue of whether a contractor had to provide contractually required notice of claims arising from a price adjustment for work deleted from the contract. The Owner had issued a Work Order that removed specific work from the Project. The Owner subsequently issued a Unilateral Change Order reducing the contract price to reflect the elimination of work under the Work Order.

The Owner argued that the Joint Venture failed to file a Notice of Claim until four months after it was due and, therefore, no claim arising from the Work Order could be made by the Joint Venture. The Joint Venture argued that since the contract did not specifically address claims arising from a price adjustment for work deleted from the contract, no notice of claim was required.

The Supreme Court of Virginia disagreed with the Joint Venture. The Court reviewed the contract language between the parties and determined that a change to the contract price occurred when the Owner's Unilateral Change Order redefined the contract price in the amount of a $69,000 deduction. As such, under the contract, the Joint Venture was required to give notice to the Owner that it was claiming additional compensation beyond the contract price. According to the Court, the contract language required notice when the Joint Venture sought to claim additional compensation beyond the contract price, as adjusted, which includes the circumstance where an owner's elimination of work resets the contract price.

Comment

The Court made clear that, absent a contract provision to the contrary, a contractor whose performance is delayed by the actions of a public owner may be entitled to recover delay damages. The Court also held that the Virginia Public Procurement Act broadly prohibits any contract provisions that seek to waive, release, or extinguish damages for unreasonable delay. In the Blake decision, the Court held that a contract provision that seeks to define unreasonable delay in terms of the owner's bad faith, malice, or gross negligence is contrary to the Virginia Public Procurement Act and, therefore, void and unenforceable.

Public entities in Virginia will likely revise their standard provisions to incorporate the reasoning of the Supreme Court in Blake. In doing so, care must be taken so as to avoid a unilateral expansion or contraction of a contractor's right to recover damages for unreasonable delay. Otherwise, such provisions may also be void and unenforceable as against public policy.

As to contracts currently in place, provisions restricting the contractor's right to recover for delay damages similar to those in Blake may also be void and unenforceable. Contractors may consider a review of these contracts and, to the extent that the voiding of such a provision might give rise to claims, consideration should be given to providing any notice required under the contract of such claims.

Lastly, the Supreme Court of Virginia sent a clear signal that any expansions of the limitations listed in Section 2.2-4335(A) and Section 2.2-4335(B) could only come from the General Assembly. Thus, close attention should be paid to whether the General Assembly decides to take any action in light of the Court's ruling.

For more information on this topic, please contact Robert M. Moore, Charlie C.H. Lee, or any of the attorneys in the firm with whom you have an existing relationship.