In 1998, the Ohio legislature enacted Revised Code 4113.62 declaring the very common “no damages for delay clause” void as against public policy. Despite this, many contract forms in circulation today run afoul of the statute. The statute provides that any provision of a construction agreement “that waives or precludes liability for delay…when the cause of the delay is a proximate result of the owner’s act or failure to act, or that waives any other remedy…when the cause of the delay is a proximate result of the owner’s act or failure to act, is void and unenforceable as against public policy.” R.C. 4113.62(C)(1). Provision (C)(2) of the statute applies the same restrictions to owners and contractors in regard to subcontracts where either the owner or contractor are proximate causers.
In 2005, Ohio’s Tenth District analyzed the statute in a case where a project owner (the Ohio Department of Transportation (ODOT)) contracted with a utility owner to move its utility lines prior to the start of a project. B.I. Chipping Co. v. R.F. Scurlock Co., 10th Dist. Franklin No. 04AP-1219, 2005-Ohio-6748. When the plaintiff/subcontractor arrived to perform its portion of the work, the clearing and grubbing of trees, the lines had not been moved. Id. ¶ 6. This resulted in a near doubling of the subcontractor’s cost to perform the work. Id. ¶ 9. Per the subcontract, the subcontractor was only entitled to damages for delay in the amount the general contractor received from ODOT through its claims process. Id. ¶ 18. The subcontractor asserted that the general contractor was a proximate cause of its damages because it directed the work. Id. ¶ 6. In asserting its control, it ordered the subcontractor to mobilize and demobilize several times due to utility line interference. Id. The court, however, did not directly address proximate causation. See generally, id; but see United States ex rel. Rieck Group, LLC v. Monarch Constr. Co., S.D.Ohio No. 3:08-cv-00172, 2009 U.S. Dist. LEXIS 98684, at *18 (Aug. 10, 2009) (distinguishing facts before it and noting that the general contractor in B.I. Chipping “was not at fault for the delay”). Instead, it held that the delay damages clause did not violate the statute because it was a limitation, not a waiver, of damages. B.I. Chipping, ¶ 21.
The B.I. Chipping decision has been subject to some distinction. Ohio’s federal courts, on at least two occasions, have held that if the limitation in damages “effectively precludes recovery,” the clause will be struck down. Acme Contr., Ltd. v. TolTest, Inc., 370 Fed.Appx. 647, 655 (6th Cir. 2010); Rieck Group, supra. This is the same argument unsuccessfully advanced by the appellant in B.I. Chipping. B.I. Chipping, ¶ 20.
In Acme, the Sixth Circuit Court of Appeals reviewed a contract that limited delay damages to an extension of time, if approved by project owner. Acme, at 655. The contract also restricted recovery of costs for delays caused by others only if the delay exceeded 4 months. Id. The Acme court found these provisions to result in an effective preclusion of recovery and thus a waiver. Id.
In Rieck Group, the Southern District of Ohio also found an effective waiver. The contract before it limited damages recoverable by the subcontractor to those the contractor received from the owner. Rieck Group, at *20. But, because the contractor was found to be the sole proximate cause of the delay, it would not be entitled to damages from the owner. Id. Therefore, the provision resulted in an effective preclusion of recovery. Id. It’s important to note that the court did not find the contract provision per se invalid. In fact, the contract in Rieck Group called for a similar process as that in the B.I. Chipping contract. An application of the facts of the case with the contract provision, however, resulted in an effective preclusion in violation of the statute. Id.
It is unclear if courts will continue to enforce contract provisions similar to that in B.I. Chipping given the subsequent limitations by federal courts. After Acme and Rieck Group, courts will have great latitude in determining if a provision results in an effective preclusion. These clauses are likely to become more suspect as the remedy juxtaposed with the damages suffered becomes more disproportionate. Accordingly, reliance on the structure set forth in B.I. Chipping is risky given dearth of case law applying the statute to different factual scenarios. Parties will likely want to seek a delay damages structure that offers more certainty.
A contract structure that limits damages recoverable to general condition expenses (i.e., extended field overhead, unabsorbed home office overhead, idle labor and equipment costs, and labor and material cost escalation) is more certain to hold up under any set of facts. Some combination of general condition expenses, or liquidated damages, is also an option. This structure will likely survive judicial scrutiny under any set of facts. It satisfies the spirit of the statute and case law by compensating the delayed party for its out of pocket expenses while avoiding consequential and other attenuated damages.
Where there are multiple proximate causers, there may be an opportunity for more protection. The statute is clear that liability cannot be waived if one’s actions or inactions are a proximate cause of the damages. R.C. 4113.62(C). However, an owner or contractor can require the aggrieved party to first seek damages from the other proximate causers. Further, the owner or contractor can require an offset of the recovered amount. This approach can run into privity problems, so upstream parties need to require the necessary provisions in all subcontracts.
In conclusion, Ohio courts will allow limitations on damages for delay so long as they do not amount to an effective preclusion or waiver. Ohio law clearly prohibits waiver of any remedies. With sparse case law applying the statute, drafters should proceed with caution when limiting damages to an arbitrary amount or those recovered from another party. The invalidation of an unenforceable clause can expose parties to consequential or other damages. A limitation on damages to general condition expenses, along with a requirement to first seek damages from other causers, is likely a provision that will survive judicial scrutiny.