In Asset Recovery Contracting, LLC v. Walsh Constr. Co. of Ill., 2012 WL 5377802 (Ill. App. Ct. 2012), the Appellate Court of Illinois held that a subcontractor could not recover for delay damages where the relevant subcontract contained a “no damages for delay” clause and no exceptions applied.

The Asset Recovery case involved the multimillion dollar redevelopment of the Palmolive Building in downtown Chicago. Building owner Palmolive Tower Condominiums, LLC (“Palmolive”) hired Walsh Construction Company (“Walsh”) as the general contractor for the project, and Walsh in turn subcontracted with Asset Recovery Contracting, LLC (“ARC”) to perform interior demolition work. After several costly construction delays caused primarily by Palmolive, ARC became financially unstable and walked out on the project prior to completion. ARC subsequently filed for bankruptcy and brought suit for damages against Palmolive and Walsh. Palmolive prevailed on a motion for summary judgment, but ARC’s claims against Walsh proceeded to trial.

The trial court ruled in favor of Walsh, finding that ARC’s subcontract contained a valid no damages for delay clause. The court further concluded that ARC breached the terms of the subcontract by leaving the project early and entered a judgment for damages in favor of Walsh on its counterclaim. ARC appealed, claiming the trial court erred in barring ARC from recovering damages for delay where the delays more than tripled the anticipated duration of the work and were beyond the reasonable contemplation of the parties.

On appeal, ARC argued that the trial court failed to apply two recognized exceptions to a no damage for delay clause: (1) delay not within the contemplation of the parties; and (2) delay of unreasonable duration. The Appellate Court first determined that the trial court did not err in concluding that the delays were reasonably foreseeable. This stemmed, in large part, from the fact that ARC knew of various delays caused by the continued occupancy of the building’s tenants prior to execution of the subcontract.

The Appellate Court also rejected ARC’s argument regarding the unreasonable duration exception. The Court upheld the trial court’s finding that schedule changes were reasonable because ARC had notice of them, and because ARC had the opportunity to negotiate different terms— including total contract price—prior to execution of the contract, but failed to do so. The Court went on to state that ARC waived any argument that the delays were of unreasonable duration by continuing to perform and submitting requests for increased costs throughout the project.

Additionally, the Court held that the sheer length of the delay (which extended the four-month project to a fourteen-month project), by itself, could not establish unreasonable delay.

ARC also urged the Court to recognize an additional exception to a no damages for delay clause recognized in other jurisdictions—“active interference” by a contracting party. ARC argued that Palmolive caused the delays by allowing its tenants to remain in the building during construction. The Court rejected this argument, explicitly stating that “active interference by a party is not one of the recognized exceptions to no damages for delay clauses in Illinois.” The Court also upheld the trial court’s refusal to make the factual finding of intentional interference by Palmolive.

This case provides important insight as to how contractors and subcontractors might respond to construction delays caused by building owners or third parties. The Court’s ruling indicates that contractors who acquiesce to delays, even implicitly through their conduct, may find themselves without adequate remedy. The ruling further demonstrates the power of a properly worded no damages for delay clause in limiting potentially significant monetary recoveries.

Construction Law Update