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holding that a no damage-for-delay clause would be unenforceable where a party had acted with "bad faith and with deliberate intent"
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Argued January 6, 1983
Decided March 29, 1983
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, IRVING KIRSCHENBAUM, J.
Frederick A.O. Schwarz, Jr., Corporation Counsel ( James P. Griffin and Leonard Koerner of counsel), for appellant. David E. Montgomery and Gary L. Rubin for respondent.
The pivotal point on this appeal is whether, under the facts and circumstances of this action for breach of a construction contract, it was reversible error, in the face of a "no-damage-for-delay" exculpatory clause, for the trial court to refuse to charge that the contractor could not recover for delays allegedly caused by the contractee, the City of New York, unless these were actuated by bad faith and deliberate intent. The exculpatory clause, article 13 of the contract, reads as follows: "The Contractor agrees to make no claim for damages for delay in the performance of this contract occasioned by any act or omission to act of the City or any of its representatives, and agrees that any such claim shall be fully compensated for by an extension of time to complete performance of the work as provided herein".
In a strenuously contested trial, the plaintiff, Kalisch-Jarcho, Inc., the successful bidder, at $8,033,000, for the heating, ventilating and air-conditioning component in the construction of the new New York City police headquarters, offered proof calculated, essentially, to convince the jury that the progress of its work was subjected to drastic and costly delays which stretched out the time for the job's completion, originally fixed at 1,000 consecutive calendar days, for an additional 28 months. Attributing this solely to the city's "endless" revisions of scores of plans and drawings, to its failure to co-ordinate the activities of its prime contractors, of which plaintiff was one of four, and to other acts of omission or commission interfering with the sequence and timing of the work, Kalisch sought $3,311,960 in damages.
Though the contract was awarded to and performed by Jarcho Bros., Inc., its affiliate, Kalisch-Jarcho, Inc., is the plaintiff in this action. The parties have raised no question concerning the seeming discrepancy. We therefore treat Kalisch-Jarcho, Inc., as the contractor for the purpose of this opinion.
In addition, it was to collect $1,854,782 for change orders, none of which it credits to the delay.
On trial, it was at Kalisch's specific request that the jury was instructed that, notwithstanding the exculpatory clause, to bring in a verdict for the plaintiff it would have to find no more than that "the delay was caused by conduct constituting active interference". Relevant also is Kalisch's position that the right to challenge the correctness of this charge was not preserved for our review.
The city, in defense, also raised issues of fact and of law. Contending that the delays were well within the contemplation of the parties, it presented evidence on which, among other things, it was possible to hold that, at the time of the bidding, the plaintiff knew that many of the drawings still were incomplete and so entered into the contract with eyes open. Moreover, the city attempted to show that the delay in any event was either greatly exaggerated or not of its making. From Kalisch's own partial payment requisitions, it argued, for instance, that 97.4% of this contractor's work was complete fully nine months before the formal completion, only routine punch list items remaining open thereafter. The city also relied on the fact that for a considerable period an industry-wide strike immobilized the project. But, above all, by way of affirmative defense, it relied on the exculpatory clause, the thrust of which, in its view, was to insulate it from any finding of delay based on less than "bad faith and deliberate intent".
In this context, the jury rendered a general verdict for the plaintiff in the sum of $806,382 to cover "delay damages [including claims of] subcontractors", whose separate damage assertions had been incorporated into the Kalisch complaint. The verdict took the form of a response to the last of a series of interrogatories drafted by the Trial Judge and, after some hesitancy by the city's counsel, submitted to the jury by consent of the parties. Important too is the jury's affirmative answer to the interrogatory which asked whether "the delay, interference or obstruction" was within the contemplation of the parties at the time the contract was made. In addition, other replies placed responsibility for the delay on both parties and then placed 63% of the blame on the city and 37% on Kalisch. And, by its answer to an interrogatory cast in language conforming to the Judge's charge, the jury further affirmed that the delay or obstruction caused by the conduct of the city constituted "active interference".
Judgment on the verdict, inclusive of interest, having been entered in the sum of $949,645.35, the city took an appeal to the Appellate Division, which affirmed without opinion. Because, on our examination of the record, we find that the correctness of the trial court's "active interference" charge was saved for our consideration, and, in our view, a stricter standard is required, the order of affirmance cannot stand. Our reasons follow.
Preliminarily, as to preservation, Kalisch's presentation is two-pronged. First, it argues that the city failed to note its exception to the charge and, second, that, assuming it had, the city in effect waived any error by acquiescing in the form of the interrogatories, which, as afore-mentioned, contained a question parroting the "active interference" charge. We find neither ground persuasive.
In essence, CPLR 4110-b provides for the filing of written requests to charge, for the court's informing counsel of its rulings and, when adverse, for counsel to have an opportunity for meaningful objection before the jury retires. On the specific matter before us now, the city in writing duly requested a charge that unless it be proved that the city "[had] acted in bad faith and with deliberate intent [to delay] the plaintiff in the performance of its obligation, plaintiff [could] not recover". In so doing, it merely kept to the legal tack it had taken, unswervingly, from the beginning of the trial. For his part, the Trial Judge, when pressed on the same request at a charge conference, if less than explicit, left no doubt of his intention to tell the jury no such thing. For, not only did he state, "I'm not going to use the word 'intent'", explaining in the process that "An intent is an important ingredient in a crime", but went on to add, "In fact, the City of New York may have done certain things with all the good intention in the world and committed a wrong." Moreover, after the court acted on this communication by charging the "active interference" formulation, when counsel began to intone each of his earlier objections, the court interrupted to assure him that all written requests had been studied and, in the interest of time, could be deemed adequately protected by blanket exception. In light of the court's elaboration of its ruling, the denial of the city's request had the earmarks of an "irrevocable" decision ( Meagher v Long Is. R.R. Co., 27 N.Y.2d 39, 46). In this perspective, counsel's desistance from continuing his ad seriatim recitation must be taken fairly as acceptance of the court's suggestion.
Indeed, spelling out his personal, albeit nondeterminative, reaction to the proof, in his preceding two sentences, the Judge, though not the fact finder, remarked, "I don't believe the City of New York had the intent to stop him. I think the City of New York was desirous of pursuing the work as diligently as possible".
Nor was the city's ultimate acquiescence in the query as to whether there had been "active interference" a waiver of its underlying contention. The Trial Judge already had ruled that he would submit the case on the contractor's rather than the city's legal theory. The interrogatory in question was but a mechanism by which the jury was to say whether there was enough credible proof to support that theory. At this purely procedural juncture, to require a rote refrain of an objection so "clearly made and overruled" would have been superfluous ( Kulak v Nationwide Mut. Ins. Co., 40 N.Y.2d 140, 145).
Turning then to the exculpatory clause, we at once note that it is cast in language which on its face, tersely it is true, but clearly, directly and absolutely, states the contractor's agreement to make no claims for delay damages caused by any act or omission to act by the city. Such a provision, not uncommon in construction contracts, especially when entered into at arm's length by sophisticated contracting parties, in this case between a large contractor and a large city, are enforceable. When inserted at the behest of public agencies, restrained as these almost always are by limited financial authorizations, the object of such a clause is not only the usually ascribed avoidance of "vexatious" litigation as to whether delays are reasonable or unreasonable or, for that matter, real or fancied, but also, hopefully, to discourage dilatoriness itself (e.g., Mack v State of New York, 122 Misc. 86, 88, affd 211 App. Div. 825; Psaty Fuhrman v Housing Auth. of City of Providence, 76 R.I. 87, 93; Christhilf v Mayor City Council of Baltimore, 152 Md. 204, 208-209; Siefford v Housing Auth. of City of Humboldt, 192 Neb. 643, 654-655).
As is true of contracts generally, implicit in the present one was the obligation of fair dealing (see Van Valkenburgh, Nooger Neville v Hayden Pub. Co., 30 N.Y.2d 34, 45; People ex rel. Wells Newton Co. v Craig, 232 N.Y. 124, 144; Restatement, Contracts 2d, § 205). Even absent an exculpatory clause, this very well may have rendered the contractee's reasonably created delay acceptable. The clause here, therefore, might have little purpose if it were not read to extend acceptability to a range of unreasonable delay as well. Manifestly, this interpretation is mandated by the clause's "unmistakable intent" that, as between these parties, the contractor rather than the contractee is to absorb damages occasioned by contractee-caused delay. For apt is the statement that public policy is not undermined by a frank recognition of such a perfectly common and acceptable business practice, by which an entrepreneur may provide protection against its own fault.
But an exculpatory agreement, no matter how flat and unqualified its terms, will not exonerate a party from liability under all circumstances. Under announced public policy, it will not apply to exemption of willful or grossly negligent acts (cf., e.g., Gross v Sweet, 49 N.Y.2d 102, 106, with Ciofalo v Vic Tanney Gyms, 10 N.Y.2d 294, 297; see, generally, 15 Williston, Contracts [3d Jaeger ed], § 1750A; 5 Corbin, Contracts, § 1068; Restatement, Contracts 2d, § 195).
More pointedly, an exculpatory clause is unenforceable when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing. This can be explicit, as when it is fraudulent, malicious or prompted by the sinister intention of one acting in bad faith. Or, when, as in gross negligence, it betokens a reckless indifference to the rights of others, it may be implicit ( Matter of Karp v Hults, 12 A.D.2d 718, affd 9 N.Y.2d 857).
Malice, in law, is a state of mind intent on perpetrating a wrongful act to the injury of another without justification ( Jestic v Long Is. Sav. Bank, 81 A.D.2d 255, 257).
Bad faith, the mirror image of good faith, connotes a dishonest purpose (cf. Uniform Commercial Code, § 1-201, subd [19] ["good faith" defined as "honesty in fact"]).
In either event, the policy which condemns such conduct is so firm that even when, in the context of the circumstances surrounding the framing of a particular exculpatory clause, it is determined, as it was by one of the interrogatories here, that the conduct sought to be exculpated was within the contemplation of the parties, it will be unenforceable (see Peckham Rd. Co. v State of New York, 32 A.D.2d 139, 141-142, affd 28 N.Y.2d 734; Johnson v City of New York, 191 App. Div. 205, affd 231 N.Y. 564).
It was against the background of these policies and principles that, as summarized above, the claim against the city centered on the extraordinarily long delay, the immense number of drawing revisions with which Kalisch was confronted and the failure to co-ordinate the contractors. By attributing all of this to the misconduct of the city, even absent any evidence of malice, Kalisch's proof, if credited, would have to establish that the city's conduct amounted to gross negligence.
In its brief on this appeal, Kalisch in part now argues that "the City's failure to disclose [that the contract drawings were defective] coupled with its positive misrepresentation of the facts at the pre-bid meeting, amounted to actual or constructive fraud". Intent is, of course, an essential element of fraud. But, even if one were to assume that such an inference can be drawn from the record, there was no request that such a theory, which would have been within the realm of willful misconduct, be charged to the jury. Concomitantly, there is nothing in the interrogatories to suggest that such a claim was to be considered.
To support such a conclusion, however, the jury would have to find more than "active interference", which, incidentally, was not a contract term. For whether conduct is "active" or "passive" does not determine wrongdoing, and "interference", which most commonly translates as "intervention" (Webster's International Dictionary [2d ed, 1950], at p 1294), does not connote willfulness, maliciousness, abandonment, bad faith or other theories through which runs the common thread of intent. So, taken at face value by the jury, the charge was calculated to expose the city to liability for conduct within the umbrella of the exculpatory clause. Accordingly, although the request to charge perhaps could have been more precisely put, the city, at the very least, was entitled to the amplifying instruction that unless Kalisch-Jarcho proved that "the City acted in bad faith and with deliberate intent delayed the plaintiff in the performance of its obligation", the plaintiff could not recover.
"Active interference" is merely one of the several expressions which courts have used in discussing a broad range of willful wrongdoing beyond the sufferance of an exculpatory clause (e.g., Cauldwell-Wingate Co. v State of New York, 276 N.Y. 365, 375 ["misrepresentation"]; Wright Kremers v State of New York, 238 App. Div. 260, mod 263 N.Y. 615 ["abandonment"]; Taylor-Fichter Steel Constr. Co. v Niagara Frontier Bridge Comm., 261 App. Div. 288, affd 287 N.Y. 669 ["unlawful interference"]; Norman Co. v County of Nassau, 27 A.D.2d 936 ["willful interference"]; Ippolito-Lutz, Inc. v Cohoes Housing Auth., 22 A.D.2d 990 ["refusals * * * to perform"]). Therefore, stare decisis, so vigorously defended by the dissent, is inapropos. Indeed, far from contributing to stability in the law, affirmance here could result in the realization of the danger warned of over 40 years ago — that a plaintiff, having waived its right to claim damages caused by delay, be able to "recover such losses by the more expediency of terming this delay '[active] interference'" ( Taylor-Fichter Steel Constr. Co. v State of New York, 261 App. Div., at p 295).
Abandonment connotes relinquishment with the intention of never resuming the interest relinquished (see Foulke v New York Consolidated R.R. Co., 228 N.Y. 269, 273).
Since there will be a new trial, we comment briefly on two other issues. The first relates to section 343a-1.0 of the Administrative Code of the City of New York, which reflects a city policy that when the cost of changes on a building project has exceeded 5% of the original cost, further changes require Board of Estimate approval; in no way did this authorize an instruction that change orders in excess of 5% are excessive vis-a-vis contractors. The second, relating to article 12 of the contract, which in substance provides, in a clause to be found in each prime contractor's agreement, that when the act or omission of another contractor is responsible for any damage, the contractor affected thereby must proceed against the offending contractor and "shall have no claim against the City"; there was no prejudice in the Trial Judge's refusal to charge this provision since this case was presented essentially on the theory that the city itself caused the delay.
For all these reasons, the order of the Appellate Division should be reversed, with costs, and a new trial granted.
Judges JASEN, MEYER and SIMONS concur with Judge FUCHSBERG; Judge WACHTLER dissents and votes to affirm in a separate opinion in which Chief Judge COOKE and Judge JONES concur.
Order reversed, etc.
The trial court committed no error of law in refusing to charge the jury that the "no-damage-for-delay" clause exempted the city from liability for its delays unless the city acted with "bad faith" or deliberate intent to delay the contractor's performance. That has never been the law in this State as the city readily conceded in its brief and on oral argument. What the city actually requests is a change in the settled meaning of the contractual term, after the parties have entered into the contract. Basic principles of fairness and stare decisis should preclude the court from granting the city this relief.
At the trial the court rejected the city's requested charge, submitted the following interrogatories to the jury and received the responses indicated:
"Was the delay, interference or obstruction within the contemplation of the parties at the time the contract was made? ANSWER: Yes.
"Even if the parties could have contemplated the delay or obstruction, was the delay or obstruction caused by conduct by the City constituting active interference with the plaintiff's performance? ANSWER: Yes."
The city did not object to these interrogatories, and indeed consented to the court's submitting them to the jury. The majority holds that this action by the city does not constitute a waiver because the interrogatories merely summarized the charge on which the court had already ruled, so that any further objection would have been futile. In its brief, however, the city concedes that there is an even more fundamental reason why further objection would have been futile.
The city states: "[The] City had no basis in law to object. The interrogatories follow precisely the decision of the Appellate Division, Third Department, in Peckham Road Co. v. State, 32 A.D.2d 139, * * * aff'd * * * 28 N.Y.2d 734 * * *. Peckham is, we believe, the most recent instance in which the 'no damage' issue was presented to this Court. It is cited by contractors constantly as the New York rule on this issue. There the Appellate Division reversed the trial court and enforced the exculpatory clause to bar recovery but stated [at pp 141-142]: 'If the delay or obstruction is within the contemplation of the parties at the time the contract is entered into the "no damage" clause will be valid and enforceable unless the delay was caused by conduct constituting active interference with the contractor's performance (see Cauldwell-Wingate Co. v. State of New York, 276 N.Y. 365)' * * * [c]learly, the interrogatories correctly reflect the rule established in Peckham which this Court had affirmed."
Thus the city itself concedes that the trial court's interpretation of the meaning and effect of the "no-damage-for-delay" clause was correct under existing law. Its argument that the contractors should have been required to prove "bad faith" or "deliberate intent" instead of mere active interference, in order to recover for the delays occasioned by the city calls for a change in the law which would reduce the city's contractual liability and, of course, also diminish the contractor's right to compensation for delays attributed to the city.
A court is bound to follow precedent unless the need for a new rule of law far outweighs the need for stability, predictability, and uniform application of the settled rules (see, e.g., Matter of Eckart, 39 N.Y.2d 493; People v Hobson, 39 N.Y.2d 479; 20 Am Jur 2d, § 187, p 523). Indeed there are precedents which establish guidelines a court must follow in determining whether an existing precedent should be overruled. Primary among them is the rule that courts should be most reluctant to change the law affecting contractual rights and commercial dealings generally ( Matter of Eckart, supra, at p 500; People v Hobson, supra, at p 489; 20 Am Jur 2d, § 192, p 529; Loughran, Some Reflections on the Role of Judicial Precedent, 22 Ford L Rev 1, 4; Cardozo, Nature of the Judicial Process, p 151). Even those, like Justice WILLIAM O. DOUGLAS, who have urged that the doctrine of stare decisis has been too rigidly applied in some areas of the law recognize a greater need for "uniformity and continuity" to preserve "the integrity of contracts" and other matters dealing with commercial and property rights (see, e.g., Douglas, Stare Decisis, 49 Col L Rev 735-736).
There are several reasons why the courts should exercise an extra measure of self-restraint in this type of case, most of which are obvious. In general terms, as former Chief Judge LOUGHRAN cautioned some time ago, "[I]t is important to bear in mind that the overruling of a precedent may often cause more harm than good by the unsettling effect that it may have upon transactions concluded in reliance on the previously declared rules" (Loughran, op. cit., p 4). Those engaged in business enterprises have a need to know with reasonable certainty the legal consequences of their actions before they make contractual arrangements ( People v Hobson, supra, at p 489). Changes in the law retroactively altering the legal effect of contractual terms frustrates the legitimate expectations of those who relied upon the prevailing law and has an unsettling effect on the business community ( People v Hobson, supra, at p 489). Thus in cases involving property and contractual rights "where it can reasonably be assumed that settled rules are necessary and necessarily relied upon, stability and adherence to precedent are generally more important than a better or even a 'correct' rule of law" ( Matter of Eckart, supra, at p 500).
In fact there is rarely a compelling need for judicial intervention to correct an "erroneous" but long-standing interpretation of a contractual term. Unlike constitutional rulings, where the only alternative to court correction of court-created error is the cumbersome process of constitutional amendment ( People v Hobson, supra) or "erroneous" statutory rulings, which may be rectified by the simpler but still imposing legislative process ( Matter of Eckart, supra, at pp 498-500), a party who is discontent with a court's interpretation of a contractual term may easily correct the "error" in future cases by simply redrafting the contract. In short, in cases where the court is asked to correct an "erroneous" precedent interpreting a contractual term the potential adverse effects are rarely justified or outweighed by any need to provide a "better" rule for the future.
A proper consideration of these factors should require the court to adhere to precedent in the case now before us. The "no-damage-for-delay" clause has been a standard feature in public contracts in this State for many years (see, e.g., Cauldwell-Wingate Co. v State of New York, 276 N.Y. 365; Wilson English Constr. Co. v New York Cent. R.R. Co., 240 App. Div. 479; 10 N.Y. Jur, Contracts, § 355, pp 336-338). Despite its broad wording it has been consistently held to permit a contractor to recover for delays occasioned by active interference by the municipality (see, e.g., Cauldwell-Wingate Co. v State of New York, supra; Johnson v City of New York, 191 App. Div. 205, affd 231 N.Y. 564; Ippolito-Lutz, Inc. v Cohoes Housing Auth., 22 A.D.2d 990; Norman Co. v County of Nassau, 27 A.D.2d 936). Although, of course, the city would not be permitted to claim the benefit of the exculpatory clause where it had acted with bad faith or deliberate intent to delay performance (see, e.g., People ex rel. Wells Newton Co. v Craig, 232 N.Y. 125), that has never been held to be a necessary component of active interference. Indeed in many cases the courts of this State have recognized the right of public contractors to recover for delays, despite the exculpatory clause, where the State, municipality or other owner has merely failed to carry out its obligations to provide proper plans, materials, services or supervision of the worksite (see, e.g., Johnson v City of New York, supra; Cauldwell-Wingate Co. v State of New York, supra; Wilson English Constr. Co. v New York Cent. R.R. Co., supra; Ippolito-Lutz, Inc. v Cohoes Housing Auth., supra; Norman Co. v County of Nassau, supra; Peckham Rd. Co. v State of New York, 32 A.D.2d 139, affd 28 N.Y.2d 734).
Municipalities and public contractors who enter into public contracts are not neophytes ignorant of the legal consequences of standard contractual terms which have been repeatedly interpreted and applied by the courts (cf. Levine v Shell Oil Co., 28 N.Y.2d 205). As the majority notes this case involves "sophisticated contracting parties". In addition the evidence shows that both sides knew that there would be delays in the performance of the contract. Under settled law that meant that the contractor might be entitled to additional compensation if the delays were occasioned by the city's active interference, even if the city acted in good faith with no deliberate intent to interfere with the contractor's right to complete performance in the time specified.
If the city was not willing to accept the bid on those terms it should have altered its contract accordingly (cf. Conduit Foundation Co. v State of New York, 52 N.Y.2d 1064; Peckham Rd. Co. v State of New York, supra). Then the contractor would have been on notice that it could not recover for delays which would generally be compensable as a matter of law and could have adjudged its bid to cover this additional risk. In future cases the city is free to follow this course if, as it contends, it finds the legal effect of its current contract financially unacceptable. The court, however, should not alter the settled meaning of a standard clause in a municipal contract after the contract has been awarded to a public bidder, particularly where the successful bidder has fully performed its part of the bargain.
Accordingly, I would affirm the order of the Appellate Division.