For data center projects, the stakes are uniquely high. Tight schedules, massive capital outlays, and owner-driven scope changes are the norm. An owner who wants to limit delay exposure needs precise, unambiguous contract language. Boilerplate language will not do the job. To reduce risks, contractors and owners need to understand the rules before they sign and should consider purchasing appropriate insurance.

Owners should be aware of Pennsylvania law concerning “no damages for delay” clauses and liquidated damages clauses when drafting and negotiating agreements with contractors.

“No Damages for Delay” Clauses

A “no damages for delay” clause is a contract provision, commonly found in construction contracts, that bars a contractor or subcontractor from recovering monetary damages caused by project delays. Instead, the delayed party's remedy is usually limited to a time extension.  Owners use these provisions to cap exposure when schedules slip.

Under Pennsylvania law, “no damages for delay” clauses are generally enforceable.  John Spearly Const., Inc. v. Penns Valley Area School Dist., 121 A.3d 593, 601 (Pa. Commw. Ct. 2015).

Pennsylvania appellate courts hold that “no damages for delay” clauses are exculpatory provisions – that is, designed to release or limit a party’s liability from damages, negligence, and wrongful conduct. Coatesville Contractors & Eng'rs, Inc. v. Borough of Ridley Park, 506 A.2d 862 (Pa. 1986).

The enforceability of “no damages for delay” clauses is constrained by the more general principle that exculpatory clauses are disfavored under Pennsylvania law. Valhal Corp. v. Sullivan Assocs., Inc., 44 F.3d 195, 202 (3d Cir.1995). Nevertheless, they may be valid and enforceable if stringent standards are met. Keystone Aeronautics Corp. v. R. J. Enstrom Corp., 499 F.2d 146, 149-50 (3d Cir. 1974).

A party seeking enforcement of an exculpatory clause must satisfy four requirements under Pennsylvania law:

(1) Courts will strictly construe such clauses;

(2) with every “intendment” (the true meaning or intention) against the party who seeks immunity from liability;

(3) the contract must spell out the intention of the parties with the greatest of particularity; and

(4) the burden is upon the party asserting the immunity.

Keystone Aeronautics, 499 F.2d at 149-50.

An exculpatory clause is valid if:

(1)  it does not violate public policy;

(2)  the contract relates solely to the private affairs of the contracting parties and does not include a matter of public interest;

(3)  each party is a free bargaining agent; and

(4)  it is clear that the beneficiary of the clause is being relieved of liability only for his or her own acts of negligence.

Valhal Corp., 44 F.3d at 202.

Pennsylvania law also provides that “no damages for delay” clauses cannot be raised as a defense where: (1) there is an affirmative or positive interference by the owner with the contractor's work; or (2) there is a failure on the part of the owner to act on some essential matter necessary to the prosecution of the work. Coatesville Contractors & Eng'rs, Inc. v. Borough of Ridley Park, 506 A.2d 862, 865-66 (Pa. 1986); Henry Shenk Co. v. Erie County, 178 A. 662, 664 (Pa. 1935).

Affirmative or positive interference sufficient to overcome the “no damages for delay” clause may involve availability, access or design problems that existed prior to the bidding process and were known by the owner but not by the contractor. See generally Coatesville, 506 A.2d 862. 

Liquidated Damages Clauses

 A liquidated damages clause sets a pre-agreed amount of money one party must pay the other if it breaches the contract. Owners frequently include liquidated damages provisions in data center construction contracts. The appeal is obvious. Rather than proceeding with uncertainty, the parties agree upfront on a per-day rate from the outset.  

Pennsylvania courts will enforce liquidated damages clauses as long as they are a reasonable forecast of the possible harm and not tantamount to a penalty.  Pantuso Motors, Inc. v. Corestates Bank, N.A., 798 A.2d 1277, 1282 (Pa. 2002).

In determining whether a damages stipulation is an unenforceable penalty or a valid liquidated damages provision, courts go through a multi-step analysis considering:

(1)   the intention of the parties,

(2)   drawn from the words of the whole contract,

(3)   examined in the light of its subject-matter and its surroundings.

Courts consider the relation which the sum stipulated bears to the extent of the injury which may be caused by the several breaches provided, the ease or difficulty of measuring a breach of damages, and such other matters as are legally or necessarily inherent in the transaction.  RCN Telecom Servs. of Philadelphia, Inc. v. Newtown Twp., Bucks Cnty., 848 A.2d 1108, 1116 (Pa. Commw. Ct. 2004).

Parties who properly agree to include a liquidated damages clause in their contract cannot later claim entitlement to actual damages. Carlos R. Leffler, Inc. v. Hutter, 696 A.2d 157, 162 (Pa. Super. Ct. 1997).

Enforcing a liquidated damages clause can be challenging.  First, proving that a liquidated damages provision is a reasonable forecast of the possible harm can be difficult in the data center context. Lease revenue, power sales, and hyperscaler service credits are often hard to pin down at the time the contract is signed. Second, a liquidated damages rate set too high relative to actual anticipated harm looks punitive and may be considered a penalty, and courts applying Pennsylvania law may not enforce it.  See Pantuso, 798 A.2d at 1282.

Industry experts commonly estimate that each day of delay on a data center project costs approximately $2 million. That figure reflects lost revenue, increased financing costs, contractual penalties with end users, and operational disruption. For a large hyperscale facility, the number can be higher.

These serious exposures require careful contract drafting at the front end, financial risk assessment, and insurance planning that accounts for both scenarios. Most data center construction projects carry builder's risk insurance, and sophisticated owners layer business interruption coverage on top of that. Pennsylvania’s geographic profile makes that coverage critical.

Available Insurance Coverages

The vast majority of new data center construction underway or planned in Pennsylvania are concentrated primarily in the Scranton–Wilkes-Barre/Hazleton corridor, with a secondary concentration in western Pennsylvania in the Homer City area.  Severe weather events in these regions, including snow or hail, can cause significant construction delays and physical losses.

A basic Builder’s Risk insurance policy will cover physical loss or damage to the physical property and tangible assets involved in the project.  However, damage often results in delays that lead to additional costs that a basic Builder’s Risk policy does not cover -- including additional construction loan interest, renewing permits or licenses, legal or accounting fees, reinspection fees, project administration fees, and security expenses. These “soft costs” usually are covered by endorsements.   Builder’s Risk insurance policies usually are not form based, but instead are manuscript policies  -- i.e., customized agreements.

Policyholders also can purchase “delay in completion” coverage by endorsement for losses incurred from completion delays that do not result from covered causes of loss under the policy. Non-covered losses include labor disputes and strikes, trade embargoes, and acts of God. Delay in completion coverage extends to the named insured’s (typically, the project owner) consequential damages.

Owners also can purchase a Business Interruption (“BI”) endorsement to cover revenues lost to construction delays stemming from physical damage that actually and necessarily interfere with or suspend business operations.  BI typically covers net profit or loss, fixed costs, continuing expenses, and expenses incurred to avoid or minimize a delay in opening.

Owners also can purchase contingent business interruption ("CBI") coverage. CBI responds when damage at a third-party facility interrupts the policyholder's project. The covered location need not be on site. It can be a supplier, customer, or service provider whose loss disrupts the data center build, as when a fire at a transformer factory delays equipment with a year-long lead time.

Coverage disputes are common. Insurance companies frequently contest causation, scope, and valuation. When a delay follows a weather event on a data center project, the interaction between builder's risk claims, liquidated damages obligations, and contract delay damage provisions creates layered complexity. Getting that right requires construction counsel and insurance coverage counsel working together from the first notice of loss.

Conclusion

Builders and contractors should engage construction and insurance coverage counsel early. The legal issues on a delayed data center project touch contract law, construction law, and insurance law simultaneously. Waiting until the dispute matures to bring in counsel can lead to significant loss and create significant legal expenses in tackling the problem.

Keith A. Lazere is a shareholder in Anderson Kill’s New York office and co-chair of the firm’s Data Centers Group. He advises and represents businesses in complex, high-stakes commercial disputes, serving as lead counsel in trial and appellate matters in state and federal courts. His practice encompasses business torts, fraud, contract disputes, corporate governance and partnership conflicts, employment litigation, and debtor-creditor matters. He also serves as the firm’s deputy general counsel.

Neil C. Schur is a shareholder in Anderson Kill’s Philadelphia office and co-chair of the firm’s Labor and Employment Group and Antitrust and Unfair Competition Group. He is a veteran commercial litigator who helps businesses tackle employment, antitrust, and commercial disputes, advocating for clients at both the trial and appellate levels in multiple jurisdictions.

Shakuwra Gay is a law clerk in Anderson Kill’s New York office and a rising third-year law student at CUNY School of Law in New York City.