Appeals Court Upholds Multi-Million Dollar Judgment Against Board of
Education for Construction Delays
By Robert C. Epstein, Greenberg
Traurig, New Jersey Office
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Lessons for New Jersey School Districts from the Atlantic City Case
|"Because the contracts were poorly
written, the Board endured six years of difficult and expensive
litigation culminating in a multi-million dollar judgment in the
In a decision issued March 2, 2004, the Appellate Division of the New
Jersey Superior Court upheld a $2,275,000 damage award against the Atlantic
City Board of Education arising from construction of the Atlantic City High
School. The decision contains important lessons for New Jersey school districts
involved in construction projects.
The high school construction project had an ambitious schedule, with
tight interim and final completion dates. Delays arose early and cascaded
throughout the project.
Even before construction began, the project was impacted by delayed approvals
from State agencies of the plans and specifications. The school was built
on reclaimed marshland, requiring extensive work to prepare the site in
advance of construction. The site work was delayed by a combination of wet
weather, contract disputes and unforeseen site conditions. Construction
of the foundations was further delayed by bad weather. Construction of the
buildings was impacted by the delays in the site work and foundations. Those
delays pushed construction of the buildings from the summer and fall into
a winter which was unusually severe, compounding the prior delays. These
problems delayed permanent enclosure of the building, which in turn impacted
construction of the interiors. Delays also were encountered in the start-up
of essential systems such as the fire alarms.
Two contractors sued the Board seeking millions in “delay damages” resulting
from the many project delays and “acceleration damages,” claiming that the
Board forced them to accelerate their work to make up for the delays. The
Board asserted that, under the construction contracts, the delays were the
contractors’ responsibility and also that the contracts protected it from
liability for delay or acceleration damages. The Board in turn sought millions
in liquidated damages from the contractors for late completion of the project
as well as lost State aid which it attributed to the contractors’ breaches.
The Board moved to dismiss all of the contractors’ claims, arguing that
the construction contracts barred the contractors from recovering damages
related to the delays. Those motions were denied by the trial judge who
found that, because the contracts did not clearly bar the contractors’
claims, the jury should decide who was at fault. After six years of protracted
discovery and pre-trial motions, and after a two-month trial, the jury determined
that the Board was primarily responsible for the construction delays and
awarded $2,275,000 in damages to the contractors.
The Appellate Division upheld the jury verdict, agreeing with the trial
judge that the construction contracts did not clearly bar the contractors’
claims and therefore the issue of who was responsible for the delays was
a jury question. The Appellate Division rejected the Board’s contention
that contractual risk-shifting provisions prohibited the contractors’ delay
claims, stating: “Simply put, the claims based upon the delays were not
clearly and unambiguously precluded by the risk-shifting provisions of the
contracts.” The Appellate Division also rejected the Board’s argument that
the contractors could not recover delay damages, finding that the contracts
did not include a “no damages for delay” clause expressly prohibiting monetary
damages arising from delays in construction. Alliance Electric, Inc.
and CJ Electrical Contractors of South Jersey, Inc. v. Atlantic City Board
of Education, Docket No. A-633-01T2 (App. Div. March 2, 2004).
Lessons for New Jersey School Districts
The Atlantic City case presents several crucial lessons for New Jersey
school districts involved in construction projects.
The Importance of Effective Construction Contracts. Although drafted
by the school district, the construction contracts failed to protect the
Board. The contracts attempted to prevent precisely the kinds of claims
which the contractors asserted in the litigation, but did not do so effectively.
Critical provisions intended to shift foreseeable project risks (such as
delays in obtaining project approvals, bad weather, etc.) were ambiguous.
The contracts also failed to include a “no damages for delay” clause, thereby
allowing the contractors to bring multi-million dollar claims which the
Board believed were barred by the signed contracts. Because the contracts
were poorly written, the Board endured six years of difficult and expensive
litigation culminating in a multi-million dollar judgment in the contractors’
The lesson for school districts is that well-drafted construction contracts
can make all the difference between years of arduous litigation with multi-million
dollar liability to contractors, and dismissal of a contractor suit at an
early stage at minimal expense. The importance of effective contracts on
school construction projects simply cannot be overemphasized.
Include a “No Damages for Delay” Clause. One of the most important
protections for a school district involved in construction is an effective
“no damages for delay” clause. The purpose of such a clause is to prevent
a contractor from claiming damages against the district arising from delays
on a construction project, no matter who causes the delays. The clause limits
the contractor’s recourse to an extension of time to complete its work.
An effectively drafted “no damages for delay” clause is critical to school
districts, which typically have a limited budget and very little direct
control over delays or potential delays on a construction project. Although
a recently enacted statute limits the scope of such clauses, drafting techniques
exist which can provide the district with maximum protection against contractor
claims for delay and acceleration damages.
Consider Allowing Compensation for Unforeseen Site Conditions.
The Atlantic City construction contracts attempted to shift the risk of
unforeseen site conditions to the contractors, but did so ineffectively.
The result was years of litigation over who was responsible for unexpected
conditions encountered at the site. Had the contracts permitted additional
compensation to the contractors for differing site conditions, a major dimension
of the litigation could have been avoided while continuing to protect the
school district’s interests.
Views differ on whether, and to what extent, a contract should provide
additional compensation for differing site conditions. Some form contracts
(such as the Federal and AIA standard general conditions) include a differing
site conditions clause that entitles the contractor to additional compensation
for unexpected subsurface conditions meeting certain criteria. The assurance
of equitable compensation for differing site conditions encourages prudent
contractors to submit lower bids, unencumbered by contingencies for unknown
conditions. Perhaps just as important, a differing site conditions clause
helps protect prudent contractors against being underbid by competitors
who are either too careless or too reckless to include such a contingency.
School districts should consider including a differing site conditions
clause in construction contracts, because such a clause is likely to meaningfully
lower the bids which the district receives through public bidding and at
the same time diminish disagreements which may lead to litigation.
Choose the Best Dispute Resolution Process for the District. Under
the Atlantic City construction contracts, disputes between the Board and
contractors were resolved in litigation. This was the Board’s choice because
the Board entirely controlled the form of contract which was put out for
public bid. The litigation process went on for six years, leading to a two-month
jury trial and an appeal to the Appellate Division of the Superior Court.
School districts should consider alternatives to litigation when preparing
construction contracts. Although there is no “best” procedure for resolving
construction disputes, a wide variety of techniques are available. Each
technique has advantages and disadvantages which must be evaluated in light
of the district’s objectives and the specifics of the project. The first
critical issue the district must consider is whether claims asserted by
and against it will be presented to a court (with or without a jury) or
in an alternative dispute resolution (ADR) process The most common ADR process
is arbitration but ADR also includes mediation, mini-trial, dispute review
board and private trial. In deciding whether claims should be resolved via
litigation or one of the ADR techniques, a number of considerations come
Speed. Is it important that disputes be resolved quickly? In
theory, ADR techniques reach a final result much faster than court litigation.
ADR, however, sometimes fails to deliver on its promise of quickly resolving
Cost. Several ADR methods promise and deliver real cost savings
Discovery and Motion Practice. While discovery may be permitted
in an ADR process, its scope will likely be limited. The absence of full
discovery is a double-edged sword—it eliminates the most expensive aspect
of litigation but opens the parties to surprises at the ADR hearings for
which they may be unprepared.
Who is the Decision Maker? Educating a jury (or even a judge)
on the complexities of construction is expensive and time-consuming. When
the decision-maker is a panel comprised of experts in the field, the presentation
may be greatly simplified.
Appealability. Courts may void arbitration or other ADR awards
only on very narrow grounds. As a result, the safety net an appeals court
provides against an erroneous decision by a judge or large award by a
runaway jury simply is not available in arbitration.
Major school construction projects that are completed without major disputes
are the exception rather than the rule. The enormous costs and disruption
caused by these inevitable construction disputes require that, during the
contract drafting process, the school district give careful consideration
to crucial contract provisions which can provide maximum protection when
those disputes arise. Districts which fail to give the construction contracts
proper consideration do so at their peril.
© 2004 Greenberg Traurig
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