Sunday, September 23, 2018

When a CM Issued Owner-Disputed Subcontractor Progress Payments, It Did so at Its Own Risk and Cannot Recover Costs Ohio Appeals Court Rules

In early 2004, Manley Architectural Group (MAG) entered into an architectural services agreement with Dr. Steven Santanello (Santanello) for a $1.6 million, 5,800 s.f. home complete with stable and riding area, sitework, pond, tennis court, and outdoor pool.  During contract formation, MAG also presented Santanello a cost savings option of utilizing it as a construction manager (CM) during construction. This would be done lieu of Santanello hiring a general contractor with Santanello holding all of the subcontracts. MAG’s CM services would include, “work[ing] directly for [Santanello] bidding out to the subcontractors and suppliers on your behalf and managing the entire construction process...Added benefits are we have more involvement in the details from start to finish, you have access to all of the subcontractor bids and we can make sure the construction is performed properly.” Santanello elected for the CM option presented by MAG.

During the course of construction, the barn project suffered water infiltration problems at the roof as well as water level retention issues at the pond project.  At that time Santanello stopped paying progress invoices submitted by MAG.  A number of years after construction was finished, MAG filed suit against Santanello for breach of contract to which Santanello filed a counterclaim for breach of contract based upon improperly supervising the construction of the pond and barn. 

A bench trial was held and the trial court found the CM agreement did not make MAG a guarantor of the subcontractor’s work on the roof and pond. Furthermore, it found Santanello was in privity with the subcontractors and ultimately remained responsible for performance and deficiencies in the work.  But, it also reasoned MAG had a responsibility to monitor the work and inform Santanello of any non-conforming work.  

The trial court ultimately found MAG was owed compensation by Santanello for: 1) payments it made to subcontractors on MAG’s behalf, 2) unpaid design fees, and 3) unpaid CM fees with total interest in the amount of $224,270.  The court then found MAG was in breach as to monitoring of the roof installation at the barn awarding Santanello the cost of a replacement roof with inflation in the amount of $160,000.  Each party cross-appealed with Santanello asserting error in the award of payments to subcontractors and MAG claiming error in the award of the cost of the roof (among other errors).

The Tenth Appellate District Court first analyzed the payments MAG issued to subcontractors in the amount of $55,577.  The Court pointed to MAG's statements that it paid the subcontractors to keep them engaged and working so the project could be completed. It "made the decision on its own to start to pay some of these people just to get them back to finish the work."  The Court found that MAG did not have the authority to issue payments on the behalf of Santanello because in the CM arraignment MAG suggested, Santanello was to act as the de facto general contractor and hold all the subcontracts.  The Court further pointed to the fact that liens had been attached to the property by subcontractors and thus there was a remedy for disputes between them and Santanello.  Ultimately the Court reduced the damages award to just the design and CM fees in the amount of $27,179.

The Court next reviewed MAG’s cross-assignment of error that it was liable for the $160,000 cost for the barn roof.  The Court examined the trial court’s definition that MAG’s CM services do not require it to be the ultimate guarantor of the work, but then the trial court ultimately required MAG to guarantee the roof work by imposing all liability for leaks on it.  The Court again pointed to the record and MAG’s efforts to identify and correct the defective work going so far as hiring additional roofing companies and making structural changes to the work.  The Court found these remedial actions satisfied MAG's CM responsibilities and since it was not responsible for the ultimate installation, it should not be held responsible for a new roof system. Accordingly the Court vacated the $160,000 damages award to Santanello.


The author, Brendan Carter, Esq., is the Director of Industry Advancement & Labor Relations with the AGC of Massachusetts based in Wellesley, MA. He is a monthly contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  

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