GT Alert

Appeals Court Upholds Multi-Million Dollar Judgment Against Board of Education for Construction Delays

March 2004
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 contractors’ favor."

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 Case

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’ favor.

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 into play:

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 disputes.

Cost. Several ADR methods promise and deliver real cost savings over litigation.

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.

Conclusion

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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