North Carolina Court Rules That "No Damages for Delay" Clause Does Not Trump "Equitable Adjustment" Clause for Cost Escalation Claims

In Southern Seeding Serv., Inc. v. W.C. English, Inc., 2011 WL 6039951 (N.C. App. Dec. 6, 2011), the North Carolina Court of Appeals found that a "no damages for delay" clause does not trump an "equitable adjustment" clause in the same construction subcontract. While labor and material cost escalation are normally perceived as an element of delay damages, the court in this case found that a separate contract provision distinguishing these costs permitted their recovery. In Southern Seeding, the defendant subcontracted to perform grading and grassing work for a project located in Greensboro, North Carolina, and in turn sub-subcontracted a portion of the seeding and grassing work to the plaintiff. The parties' agreement contained an "equitable adjustment" clause stating:

Unit prices herein quoted are based upon the assumption that the contract will be completed within time as specified in the specifications at time of bidding. Should our work be delayed beyond said time without fault on our part, unit prices herein quoted shall be equitably adjusted to compensate us for increased cost...."

A separate provision in the agreement contained a standard "no damages for delay" clause, prohibiting the plaintiff from recovering any monetary compensation as a result of the defendant's delays to the project.  The project was scheduled to finish on July 1, 2007, but was not completed until March 21, 2008 - 256 days beyond its scheduled completion date. As a result of the delays, the plaintiff suffered market-driven material and labor cost increases. The plaintiff adjusted its unit prices for increased costs arising from work performed after July 1, 2007, and invoiced the defendant for these increased costs.  When the defendant refused to pay, citing the "no damages for delay" clause, the plaintiff sub-subcontractor sued the subcontractor and the project's payment bond sureties. The trial court ruled in favor of the defendant subcontractor, finding that the "no damages for delay" clause trumped the "equitable adjustment" clause, and the plaintiff appealed.

The North Carolina Court of Appeals reversed the trial court and ruled in favor of the plaintiff, finding that the parties' contract allocated two distinct risks. The "no damages for delay" clause allocated to the plaintiff the risk with respect to responsibility for extended general conditions expenses arising from delay, while the "equitable adjustment" clause allocated to the defendant the risk of increased material and labor costs arising from unforeseen circumstances. Therefore, the "no damages for delay" clause did not bar recovery for market-driven cost increases associated with material and labor costs, incurred after the scheduled completion date.

The court found that the plaintiff could also recover against the sureties as a third-party beneficiary of the payment bond executed by the general contractor.  The court held that the plaintiff was clearly an intended beneficiary of the general contractor's payment bond, given that it was designed for the protection of "all persons supplying labor and materials" to the project.  Therefore, the plaintiff could recover against the sureties for the subcontractor's non-payment.

While "no damages for delay" clauses will continue to waive any claims for extended general conditions, according to the North Carolina Court of Appeals, claims for price increases in the contract due to delay will be preserved in contracts also containing an "equitable adjustment" clause.