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Supreme Court Holds ‘No-Damages-for-Delay’ Clause in 1997 Construction Contract Is Enforceable

2005-1698. Dugan & Meyers Constr. Co., Inc. v. Ohio Dept. of Adm. Servs., 2007-Ohio-1687.
Franklin App. No. 03AP-1194, 2005-Ohio-3810. Judgment affirmed.
Moyer, C.J., Moore, Lundberg Stratton, O'Donnell and Lanzinger, JJ., concur.
O'Connor, J., concurs in judgment only.
Pfeifer, J., dissents.
Carla D. Moore, J., of the Ninth Appellate District, was assigned to sit for Resnick, J., whose term ended on January 1, 2007.
Cupp, J., whose term began on January 2, 2007, did not participate in the consideration or decision of this case.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2007/2007-Ohio-1687.pdf

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(April 25, 2007) The Supreme Court of Ohio today ruled that a “no-damages-for-delay” clause in a 1997 construction contract between Dugan & Meyers Construction Co. and the Ohio Department of Administrative Services was legal, valid and enforceable. In a 6-1 decision authored by Chief Justice Thomas J. Moyer, the Court held that, due to the terms of the parties' contract, Dugan & Meyers (D&M) was not entitled to additional compensation for changes it was required to make during the construction process or to mitigation of liquidated damages for late completion of the project.

D&M was the lead contractor selected through a competitive bidding process to manage construction of a $20 million, three-building complex at The Ohio State University's Fisher College of Business in Columbus. Construction work began in August 1997. The scheduled completion date set forth in the contract was July 13, 1999. The completion dates for the three buildings were subsequently modified by agreement of the parties to June 11, 1999, for the resource center and to July 11, 1999, for the undergraduate building and executive-education building.

Beginning in June 1998, D&M began to experience significant delays and cost overruns, which it attributed to a combination of errors and omissions in the original state-provided blueprints and plans and numerous changes the state was making to the original plans on an ongoing basis..

By February 1999 it was apparent that the project was unlikely to be completed in time to ensure completion of that portion of the project that was needed for fall 1999 classes. In early July 1999, D&M was replaced by the state as lead contractor overseeing other subcontractors, but continued to complete its own portion of the construction process. Two of the three buildings in the complex were sufficiently completed by September 1999 to host Fall Quarter classes, and the last of the three buildings was completed on January 16, 2000, six months after the parties' modified deadline.

Dugan & Meyers sought payment from OSU for services rendered under the contract. In determining the amount due, OSU deducted the amount paid to the replacement lead contractor for completing the lead-contractor duties. OSU also assessed Dugan & Meyers liquidated damages based on 188 days of delay in completion. OSU determined the liquidated damages by apportioning responsibility for the 188 days of delay between three subcontractors and Dugan & Meyers and charged Dugan & Meyers for its contribution to the project delay.

D&M filed suit in the Ohio Court of Claims alleging breach of contract by the state and seeking recovery of its cost overruns, lost profit from the project as estimated in its original bid, and the deductions made by the state from its payments to D&M. A referee was appointed to hear evidence, make findings of fact and law, and recommend a resolution.

The referee found that the fundamental issue underlying the cost overruns and six-month delay in completion of the project was “the existence of an excessive number of errors, omissions and conflicts in the design documents furnished to bidders by the state and incorporated into the [D&M's] contracts.”

The referee relied on a 1918 U.S. Supreme Court decision, Spearin v. United States, in which the U.S. Supreme Court recognized that when a contractor is “bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.” Finding that under the Spearin Doctrine D&M had a contractual right to expect complete, accurate and buildable plans and a right to recover for the state's failure to provide such plans, the referee recommended judgment in favor of D&M. The Court of Claims reviewed the referee's report and entered judgment for Dugan & Meyers in accord with the referee's recommendations.

The state appealed to the 10th District Court of Appeals. The 10th District reversed the Court of Claims ruling, and held that D&M was not excused from the requirements of the contract and that D&M had failed to provide competent evidence of actual damages. D&M appealed the 10th District's decision to the Supreme Court, and the Justices agreed to hear the case.

In today's decision the Supreme Court affirmed the 10th District's ruling. Chief Justice Moyer wrote: “This court has long recognized that ‘where a contract is plain and unambiguous, it does not become ambiguous by reason of the fact that in its operation it will work a hardship upon one of the parties thereto and corresponding advantage to the other, [and] that it is not the province of courts to relieve parties of improvident contracts.' In addition, ‘unless there is fraud or other unlawfulness involved, courts are powerless to save a competent person from the effects of his own voluntary agreement.' ”

In the contract between D&M and the state, the Chief Justice wrote: “The parties agreed, ‘time is of the essence to the Contract Documents and all obligations thereunder,' and the contract provided a specific procedure to be followed in the event of project delay. … The contract provided that the contractor's failure to request, in writing, an extension of time within ten days after the occurrence of a condition necessitating an extension of time ‘shall constitute a waiver... of any claim for extension or for mitigation of Liquidated Damages.'”

He noted that in 1998, after the parties in this case had entered into the contract at issue, the General Assembly enacted legislation holding no-damages-for-delay clauses in Ohio construction contracts to be void and unenforceable as against public policy “when the cause of the delay is a proximate result of the owner's act or failure to act,” and also declared void any other contractual provision that “waives any other remedy for a construction contract when the cause of the delay is a proximate result of the owner's act or failure to act.”

The Chief Justice also noted, however, that the 1998 legislation included specific language stating that its provisions did not apply “‘to any contracts, agreements, or understandings entered into before the effective date of this act.'... In 1997, when the appellees executed the contract with Dugan & Meyers, no-damages-for-delay clauses and provisions waiving remedies for delays caused by the owner were valid in Ohio.”

Noting that Spearin involved the existence of a site condition that precluded completion of the construction project, Chief Justice Moyer wrote that “ the case before us concerns the allocation of damages flowing from delay in completion of a construction project due to plan changes.” Accordingly, he wrote, “we decline the opportunity to extend the Spearin Doctrine from job-site-condition cases to cases involving delay due to plan changes.”

The Court also rejected D&M's argument that it was excused from complying with the specific change-order procedure for requesting extensions as well as its contention that OSU lacked standing to enforce provisions of the contract because DAS allegedly illegally assigned oversight of the contract to OSU. Chief Justice Moyer's opinion was joined by Justices Evelyn Lundberg Stratton, Terrence O'Donnell, and Judith Ann Lanzinger and by Judge Carla Moore of the 9th District Court of Appeals, who was assigned to sit for Justice Alice Robie Resnick. Justice Maureen O'Connor concurred in judgment only.

Justice Paul E. Pfeifer entered a dissent expressing his view that this case calls for an application, not an extension, of the Spearin Doctrine. “As in all Spearin Doctrine cases, the fault in this case lies with the owner's plans. It requires no leap to find that the state implicitly warranted that its plans were buildable and that that warranty prevailed over general contract provisions. An owner's plans and specifications must be reliable for the contractual process to work. The majority seems to suggest that an owner need not be concerned with preparing accurate plans, since any deficiencies must be corrected by the contractor. As it turns out, the state could have saved a lot of money on blueprints and just submitted some sketches on the backs of a few cocktail napkins,” wrote Justice Pfeifer.

“Here, the principal cause of the delay, as determined by the finder of fact, was ‘an excessive number of errors, omissions and conflicts in the design documents furnished to bidders by the state and incorporated into [Dugan & Meyers's] contracts.' There were no shifting sands, no acts of God, no surprising aquifers. As in Spearin, the designs themselves were the root of the problem.”

Peter D. Welin, 614.469.3200, for Dugan & Meyers Construction Company.

David S. Cupps, 614.464.6400, for The Ohio Dept. of Administrative Services and The Ohio State University.