Rai Indus. Fabricators, LLC v. Fed. Ins. Co., 2018 U.S. Dist. LEXIS 74612 (N.D. Cal., May 2, 2018)

Sauer Incorporated (“Sauer”) contracted with the U.S. Army to design and construct the Operational Readiness Training Complex at Fort Hunter, California. Sauer subcontracted with Agate Steel, Inc. (“Agate”) for the erection of steel for the project. Agate’s subcontract with Sauer contained a no-damage-for-delay clause, which generally provided that extensions of time were Agate’s sole remedy for delay.

According to Agate, the project suffered from substantial delays because of the acts and omissions of Sauer. In particular, Agate alleged that Sauer failed to properly coordinate the work of its subcontractors, failed to follow the project’s schedules, failed to follow the subcontract’s change order procedures, and made unanticipated changes to the project’s scope and work flow sequence. Agate argued that these delays constituted a cardinal change and/or abandonment of the subcontract, which rendered the no-damage-for-delay clause unenforceable. Agate sued Sauer for damages from the delays and disruptions to its work.

Sauer moved to dismiss Agate’s claim for delay and disruption damages. Relying on the subcontract’s no-damage-for-delay clause, Sauer argued that Agate contractually waived its right to recover delay damages, and thus Agate had failed to state a claim on which relief can be granted. The district court denied Sauer’s motion.

In its decision, the court first noted that, in general, no-damage-for-delay clauses are valid and enforceable under California law, but, that such clauses are not an absolute bar to recovery. Instead, delay damages may still be recoverable where the delays are unreasonable under the circumstances, or where the parties have impliedly abandoned the contract. The court held that Agate alleged sufficient facts to support entitlement under either theory.

First, the court held that the motion must be denied because Agate alleged sufficient facts to create a question of fact as to the reasonableness of the delays under the circumstances.

As to abandonment, the court held that Agate alleged sufficient facts to support a finding that the parties impliedly abandoned the subcontract. Under California law, the parties may be held to impliedly abandon a contract where they fail to follow change order procedures and when the final product differs substantially from the original plan. Express intent to abandon is not required. The court found that Agate’s allegations support a finding of abandonment. Specifically, Agate alleged that Sauer significantly changed the project drawings, which, in turn, required significant changes to Agate’s scope of work; that Sauer furnished hundreds of defective steel pieces, which required significant field correction by Agate; and that Sauer failed to comply with the contract requirements for extra work. The court held that, at the pleading stage, these allegations are sufficient to support an implied abandonment of the subcontract, which would render the no-damage-for-delay clause unenforceable.