There's no such thing as too much communication...Or is there?

In the matter of C.G. Schmidt, Inc. v. Permasteelisa North America the 7th Circuit decided that it indeed is possible for too much communication to scuttle a construction contract.  The appellate court affirmed the District Court's summary judgment decision that given the "extensive negotiations," the parties never entered into a binding contract. It also held that the General Contractor's promissory estoppel claim failed as a matter of law as well.

The project involved constructing an office building in Milwaukee, Wisconsin.  After protracted negotiations with the Subcontractor, the General Contractor bid on the project using a curtainwall Subcontractor's bid.  No written contract existed between the General Contractor and Subcontractor and indeed after submitting the bid the General Contractor continued to discuss terms with the Subcontractor.  The General Contractor successfully won the bid for the project.  Then the Subcontractor declined to provide the glass curtainwall due to "civil unrest in Thailand" where it would be producing the materials. The General Contractor brought suit against the Subcontractor for breach of contract and promissory estoppel.

The Wisconsin Uniform Commercial Code codifies that "offer and acceptance are defined more liberally than under Wisconsin common law." As such, "an enforceable contract may be formed by conduct, even without a signed writing embodying the agreement." The General Contractor therefore still had a viable contract claim even though the terms were not put into writing signed by both parties.  However, the General Contractor's breach claim still was defeated because "an intent to contract" did not exist. The Court observed that throughout the protracted negotiations (which included repeatedly updating the proposed contract price, debating terms, exchanging various versions of a production schedule, and jointly participating in project kick-off meetings) the Subcontractor made clear it only "intended to be bound after reviewing the prime contract [with the owner] and executing a formal subcontract with agreed upon language."  The General Contractor "never corrected this understanding nor expressed a contrary belief." Likewise, the General Contractor, the Court explained, acted as though there was no contract either -- where the General Contractor had internal policies to obtain "written agreements with all subcontractors" and to "clear [the subcontractor] with its risk management department" and where even the General Contractor's instant letter of intent stated that a future subcontract agreement would be executed to "supersede in all respects prior negotiations."  As the Court summarized "[t]o put this point another way, [the contractor] never accepted [the subcontractors] bid."  Therefore, no breach of a contract.

As for the promissory estoppel claim--that the General Contractor reasonably relied on the Subcontractor's bid when submitting its own bid to the owner--the Court was not persuaded as a matter of law. Wisconsin adheres to the general rule that "subcontractor should expect a general contractor to incorporate the subcontractor's bid" and if the general contractor gets the award, "it is only fair that [the general contractor] should have at least an opportunity to accept [the subcontractor's] bid."  However, here, where the General Contractor continued to discuss terms with the Subcontractor after submitting the bid and even after receiving the award, promissory estoppel could not lie.  As the Court explained:

This limit to the application of promissory estoppel exists because of the inequity in allowing the general contractor to shop for lower bids or negotiate with the subcontractor while holding the subcontractor to its bid. . . . . By limiting the application of promissory estoppel, the general contractor can either keep the subcontractor's bid open for a reasonable amount of time or seek a better deal, but not both.

Moreover, the Court pointed out, it was unreasonable for the General Contractor to rely on the Subcontractor's bid where the Subcontractor had advised "that it expected to review the prime contract [with the owner] and negotiate certain aspects of the subcontract prior to executing an agreement."  Such a "conditional promise" is not appropriate to rely upon.  Accordingly, the General Contractor's promissory estoppel claim was denied as well.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Does a Change in Retention Payment Terms Trigger the Prompt Payment Statute? California Appeals Court Says No.

In Blois Construction, Inc. v. FCI/Fluor/Parsons, the defendant entered into a contract in 2006 with Exposition Metro Line Construction Authority (owner) to serve as the general contractor for a light-rail project that connected downtown Los Angeles with Culver City. Defendant in turn subcontracted with plaintiff for the associated underground work on the project. The prime contract allowed the owner to withhold 10 percent of the progress payments in retention and a subcontract provision allowed the defendant to withhold 10 percent of the plaintiff’s payments in retention. The retention provision in the prime contract allowed for the 10 percent retention to be waived at the sole discretion of the owner when the project was 50 percent complete.  In December 2009, defendant requested that the owner stop withholding retention and the owner agreed with the caveat that it maintained the right to resume withholding at a later time. The owner continued to withhold all previously collected retention and did so until May 30, 2014. 

The plaintiff completed its contract work in 2011 by which time $500,000 of its progress payments had been held in retention by the defendant.  In 2012, plaintiff filed suit against the defendant and its sureties for 1) extra work on the project that it had not been paid for and; 2) for the balance of the retention on the contract. The suit was referred to a dispute review board by the courts for arbitration.  In November 2013 while the case was still pending before the board, the defendant released $534,909.89 in retention to the plaintiff.  The board ruled that all retention the defendant withheld had been required to be paid by September 2011 under the terms of the subcontract.  The board left the issue of penalties for late payment to the courts. The trial court decided that no penalties were to be incurred because the owner had not released retained funds to the defendant until 2014 and the plaintiff had been paid its full amount of retention by the end of 2013.  The plaintiff appealed.

The Court of Appeals of California, Second District, Division One started its analysis by identifying the language in California’s ‘prompt payment’ statute. California Public Contract Code Section 7107 states "within seven days from the time that all or any portion of the retention proceeds are received by the original contractor, the original contractor shall pay each of its subcontractors from whom retention has been withheld, each subcontractor's share of the retention received." The code further identifies penalties to prime contractors who do not adhere to this this time frame by stating that contractors who violate the code section, “shall be subject to a charge of 2 percent per month on the improperly withheld amount."

The plaintiffs argued that as a result of the change in payment terms where retention was no longer held on progress payments after December 2009, this constituted the “retention proceeds [being] received by the original contractor” and as a result defendant was required to pay the plaintiff its share of retention proceeds within seven days.  Plaintiff argues that by allowing the defendant and similarly situated prime contractors to continue to withhold retainage from subcontractors after the owner stops withholding would run counter to the spirit of the ‘prompt payment’ law.

The Court states that the defendant’s argument fails because Section 7107 is not applicable in this instance. The court points to the fact that even though the owner did stop withholding retention funds starting in 2010, it still withheld all previously withheld retention. The court then points to an alternate ‘prompt payment’ statute, Business and Professions Code section 7108.5, to discount the plaintiff’s “spirit of the law” argument.  Section 7108.5 requires a prime contractor to pay its subcontractors “not later than seven days after receipt of each progress payment, unless otherwise agreed to in writing, the respective amounts allowed the contractor on account of the work performed by the subcontractors."  The court finds that there is no evidence that the defendant did not adhere to this code section post December 2009 retention agreement and both “prompt payment” statutes “operated in tandem to ensure that there was no point at which [defendants] could receive payments from [owner] without paying [plaintiff] and other subcontractors their share of the proceeds.” 

The court found that as a result of the defendant not receiving retention proceeds from the owner until at least May 30, 2014, its obligation to pay plaintiff its share did not arise until that date and Section 7107 was satisfied when it paid the plaintiff in November 2013.  The ruling of the trial court was affirmed.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com.

D1 Steering Committee Meeting Minutes - June 20, 2016

Division 1: Litigation and Dispute Resolution conducts a monthly conference call of its Steering Committee and other friends/volunteers of Division 1.  Here is a link to the Minutes of the Steering Committee Meeting from June 20, 2016. 

Fifth Circuit Considers Allocation of Risk of Defective Plans and Specifications in Reversing $1.29 Million Judgment Entered in Favor of Contractor

Jeffery R. Mullen, Associate, Pepper Hamilton LLP

Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., et al., 2016 U.S. App. LEXIS 6646, 819 F.3d 245 (5th Cir. Apr. 12, 2016)

This action arose out of a construction project in terminal E of the Dallas/Fort Worth International Airport (“DFW”), in which pre-conditioned air and rooftop air handling units were to provide conditioned air (cooling and heating) to passenger boarding bridges and aircrafts parked at terminal gates (the “Project”).  In August, 2009, following a competitive bidding process, owner Dallas Fort Worth International Airport Board (the “Owner”) entered into a contract with contractor INET Airport Systems, Inc. (the “Contractor”) to construct the Project. The plans and specifications for the contract included detailed drawings, the precise rooftop units and parts to be used, approved manufacturers and performance requirements.  Under the contract and these plans, the Contractor was obligated to install operational rooftop units that were required to use 30 percent ethylene glycol/water supplied through DFW’s existing piping system. The Contractor was not allowed to substitute products or designs for those agreed upon in the contract documents without authorization from the Owner. The contract also required that if anything in the agreed-upon plans needed to be changed, the Contractor would alert the Owner and the parties would collaborate to come up with a workaround that would be incorporated into the contract by written change order issued by the Owner with agreed prices for performing the change order work.

Trouble arose when the Contractor expressed concern that the rooftop units specified in the plans might not function properly with the ethylene glycol/water mixture supplied by DFW’s existing piping system.  In an October 2009 construction kick-off meeting, the Contractor advised the Owner that the plans needed adjusting because the coolant used in the rooftop units was kept at sub-zero temperatures, risking a damaging freeze.  After receiving no immediate response to this concern, the Contractor submitted a request for information asking how it should proceed.  The parties’ ensuing discussions resulted in two proposals for how to add control sequences (“Control Sequence Proposal”) or revised piping (“Revised Piping Proposal”) to the units to prevent potential problems.  While the Contractor rejected the Control Sequence Proposal, the record was unclear as to what happened with the Revised Piping Proposal, other than that the parties did not formally price the change or incorporate it into their contract. Despite significant communication on the matter, the parties were never able to agree on how to proceed.  Months later, the Owner told the Contractor it failed to meet the substantial completion deadline and subsequently refused to pay at least two invoices from the Contractor.   In 2012, after contracting with another company to complete the construction, the Owner initiated litigation against the Contractor in which each party accused the other of breaching the contract.  Both the Owner and the Contractor moved for summary judgment on their claims.

The district court determined that the case turned on which party first breached the contract and concluded that the contract placed the risk of defects in the designs and specifications on the Owner, that the Owner had admitted the designs and specifications were defective, and that the Owner therefore breached the contract by failing to acknowledge the defects and issue appropriate change orders.  As a result, the district court granted summary judgment for the Contractor and, after a bench trial on damages, awarded damages and attorneys’ fees to the Contractor in the amount of $1.29 million.  The Owner appealed.

The United States Court of Appeals for the Fifth Circuit concluded it was error for the district court to grant summary judgment for the Contractor because the record contained disputed facts regarding which party first prevented performance by failing to fully cooperate in arriving at a solution once the parties discovered defects in the plans and specifications.  Finding that there was no dispute that the plans and specifications were defective, the Court focused on which party was responsible under the contract for defective plans and specification and what the contract required of each party once the Contractor alerted the Owner to a defect that would prevent its performance.

First, the Court disagreed with the district court’s finding that the contract allocated the risk of defective plans and specifications solely to the Owner.  The Court found that while the Owner partly bore the risk of defective plans and specifications, the contract allocated some duties to the Contractor as well, duties that required the Contractor to cooperate or take other actions in this case to help resolve the discrepancy between the contract’s requirements and the plans and specifications.  For example, the Court noted that if the engineer or the Owner determined that changes were necessary after the Contractor pointed out a potential error, the contract required that the parties mutually agree upon the workaround and how to adjust for the change or modify the contract.  Thus, the Court concluded that the contract contained a mixture of provisions that placed the risk of defects on both the Owner and the Contractor, and that both parties had a duty to cooperate in finding a solution to the defect.

The Court then considered which party breached the contract by failing to participate in resolving the defect and agreeing to the associated change order or modification to the contract. The Contractor acknowledged that it rejected the Control Sequence Proposal, but pointed to requests for information to support its claim that the Owner breached the contract by failing to issue a change order and incorporate the Revised Piping Proposal into the contract.  However, the Owner argued that the Contractor had rejected the Revised Piping Proposal as well, pointing to correspondence between the parties and deposition testimony on the subject.  The Court found that this non-conclusory evidence created a dispute of material fact as to whether the Contractor rejected the Revised Piping Proposal outright or hindered the process of agreeing to this or another solution.  The Court concluded that, “[s]ifting through the evidence to determine whether the parties reached agreement on a contractual modification is a task ill-suited for summary judgment on this record. For these reasons, and because disputes of material fact remain regarding whether [the Owner] or [the Contractor] breached the contract by preventing an agreement about how to address defects in the contract’s plans and specifications, we reverse the district court’s grant of summary judgment for [the Contractor].”

Consequently, the Court reversed the district court’s grant of summary judgment for the Contractor and remanded the case for the breach of contract claims to proceed to a fact finder.

Article originally posted June 28, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group.