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PCCA Journal|1

st

Quarter 2010

26

a clause in the contract that merely

allows the contractor to receive an

extension of time and no monetary

damages for owner-caused delay. A

typical provision is as follows:

If the contractor is delayed by

the owner or architect or any

agent or employee of either, the

contractor’s sole and exclusive

remedy for the delay shall be

the right to a time extension for

completion of the contract and

not damages. This provision does

not preclude the owner’s recovery

of damages for contractor-caused

delay under other provisions of

the contract documents.

Most of the standard contract

forms do not include a clause limit-

ing the contractor’s recovery of

damages for delay. “No Damages For

Delay” clauses are generally enforce-

able, but they are strictly construed

by the courts. The contractor may

circumvent such a clause and

recover additional damages if the

delay (a) was not contemplated

by the parties, (b) amounted to an

abandonment of the contract by the

owner, (c) resulted from the owner’s

bad faith or arbitrary action, or (d)

resulted from the owner’s active

hindrance or interference with the

contractor’s work.

Notice Requirements

If a contractor is going to recover ex-

tra compensation or time extensions

from the owner, it must comply with

contractual notice requirements.

Every contract requires the contrac-

tor to provide the owner with some

type of notice for various claims,

and the contractor should be careful

to adhere to these notice provisions.

Notice provisions vary, so identify

and be familiar with the ones in

your particular contract. Pay particu-

larly close attention to those claims

for which notice is usually required,

including differing site conditions,

changes, and delays. Also determine

how much notice the owner must

give the contractor if it wishes to

take over the work or terminate the

contract.

Like all contract provisions, notice

obligations may be waived or modi-

fied by conduct or informal agree-

ment. For instance, the owner’s

actual knowledge of and acquies-

cence in the work has been held

by the court to impliedly waive the

notice requirement. Other instances

in which the notice requirement has

been waived include: (1) a course

of dealing that repeatedly disregards

the requirement, (2) a promise to

pay for extra work orally requested

by the owner and performed in reli-

ance upon the promise, or (3) any

other actions or omissions by the

owner inconsistent with an intent

to insist upon the requirements.

However, it is never advisable for a

contractor to neglect to comply with

notice requirements in the expecta-

tion that a court will conclude that

the owner waived its right to notice.

A legal case is an expensive proposi-

tion, particularly when it is a case

for waiver of clear contractual notice

requirements based on he-said-she-

said oral evidence.

Pay-When-Paid and

Pay-If-Paid Clauses

The general rule is that, as between

the contractor and the subcontractor,

the contractor bears the risk of an

owner’s insolvency or an architect’s

refusal to certify an application for

payment. This rule flows from the

relationship between the parties.

The contractor is in privity of con-

tract with the owner and thus is in

a position to protect itself from the

risk of late payment or insolvency

through the use of contract clauses,

guarantees, and similar devices. A

subcontractor, in contrast, is not in

privity with the owner and therefore

is not able to protect itself from the

owner’s late payment or insolvency.

Contractors have attempted to

shift the risk of the owner’s late pay-

ment or insolvency to subcontrac-

tors through the use of “pay-if-paid”

clauses. In most jurisdictions a pay-

if-paid clause will be effective only if

written in unequivocal, unambigu-

ous language. An effective pay-if-

paid clause would likely be created

by the following: “Payment by the

owner to the general contractor is a

condition precedent which must oc-

cur before the general contractor will

be obliged to pay the subcontractor.

The subcontractor hereby assumes

the risk of the owner’s insolvency or

of late payment by the owner to the

general contractor and agrees that

payment to the subcontractor will

be made only with funds received

by the general contractor from the

owner in payment for work per-

formed by the subcontractor.”

If clear and unambiguous lan-

guage is not used, the courts will

likely interpret the clause as a

“paid-when-paid” clause, meaning

only that the contractor will pay the

subcontractor either after it gets paid

by the owner

or

within a reasonable

period of time after the subcontrac-

tor’s payment application. This is

more a matter of the timing of pay-

ment as opposed to the right to it.

Termination Clauses

Termination clauses also vary con-

siderably from contract to contract.

A typical termination provision pro-

vides for termination by the contrac-

tor and the owner as follows:

Termination by the Contractor

If the work is stopped for a period

of 30 days under an order of any

court or public authority having

jurisdiction, or as a result of an act

of government, such as a declara-

tion of a national emergency mak-

ing materials unavailable, through

no act or fault of the contractor or

a subcontractor or their agents or

employees or any other persons

performing any of the work under

a contract with the contractor, or

if the work should be stopped for

Legal Watch

Continued from page 25