A Contractor's Second Chance - The Massachusetts Supreme Judicial Court Relaxes Rules to Establish Contract Performance & Equitable Claims

In G4S Tech. LLC vs. Mass. Tech. Park Corp., SJC-12397, -- N.E.2d --, (Mass. June 13, 2018) the Supreme Judicial Court of Massachusetts clarified that to recover under the contract itself “complete and strict performance requirements” only applies to the provisions regarding “the design and construction work," but that for breaches of other provisions ordinary contract principles of materiality control.  The Supreme Judicial Court also overturned a line of cases that established the rule that intentional violations of contract provisions “precluded a finding of good faith to fully perform,” barring quantum meruit claims.  The Supreme Judicial Court articulated its new rule, “that intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”

This contract dispute arose from a construction project to build a fiber optic network spanning 1,200 miles and 123 communities throughout western and central Massachusetts.  Massachusetts Technology Park Corporation (MTPC) received funding for this project from both state and federal government funding. MTPC awarded G4S Tech. LLC (G4S) the design-build project for a total contract value of $45.5 million.  Due to restraints imposed by the federal government based on its funding, the project had to be completed within a certain period of time. Thus the contract had several provisions regarding G4S’s liability and responsibility for not completing specified portions of the project by specific deadlines.  The project was completed over one year after the specified project deadline, however, the facts are disputed as to whether GS4 or MTPC was at fault for the delay.  Due to the delays in completion, MTPC refused to pay G4S the last $4 million owed under the contract,  withholding the amount as liquidated damages for the delays.  Further, MTPC later discovered that G4S violated a provision requiring that the subcontractors be paid on time, instead G4S delayed paying subcontractors until after their fiscal quarters closed, to show “a more favorable cash flow in its quarterly reports.”  G4S brought claims under breach of contract and quantum meruit theories, MTPC then brought a fraud claim against G4S.

Massachusetts’s rule for performance of construction contract terms is “that a contractor cannot recover on the contract itself without showing complete and strict performance of all its terms…” G4S argued that this rule was outdated and the Supreme Judicial Court should adopt the “materiality rule” per the Restatement (Second) of Contracts.  While the Supreme Judicial Court declined a wholesale adoption of the Restatement, it did clarify that this rule is limited only to “the design and construction work” and that other provisions “should be analyzed pursuant to ordinary contract principles, including the materiality standard[.]"  That said, in this case, the complete and strict performance requirement controlled because “paying subcontractors on time was an essential and inducing feature of the contract between MTPC and G4S.”  The Court noted that a public works project "prompt" payment is a "legislative purpose" and the Recovery Act's purpose, under which this project was funded, was to maximize jobs and improve the economy. By not properly paying the subcontractors, G4S was clearly frustrating that purpose.  The Supreme Judicial Court subsequently upheld the trial court’s granting of summary judgment to MTPC as to the contract claim.

Turning to G4S’s quantum meruit claim, historically, a line of Massachusetts cases supported the rule that “[g]enerally, ‘[i]n the absence of special exculpating circumstances and intentional departure from the precise requirements of the contract is not consistent with good faith in the endeavor fully to perform it, and unless such departure is so trifling as to fall within the rule de minimis, it bars all recovery.’”  The Supreme Judicial Court decided, after sources have long criticized and questioned the rule, that “intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”  Under this new rule, the Supreme Judicial Court reversed the granting of summary judgment to MTPC as to the quantum meruit claim due to disputed factual questions as to which party caused the delay in completion of the project.

Lastly, the Supreme Judicial Court reversed the trial court’s decision to dismiss MTPC’s fraud claim under a duplicative damages analysis. The Supreme Judicial Court determined that there were “separable and distinguishable acts forming the basis of recovery under the breach of contract and fraud claims.”  Accordingly, the Supreme Judicial Court remanded the quantum meruit and fraud claims to the Superior Court.

-------------------
Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.  She thanks Brenna Riley, a rising 3L at Roger Williams University in Bristol, Rhode Island, for this noteworthy case review.

1st Circuit Pending Appeal - Construction Contract Defenses & Miller Act

https://www.va.gov/directory/facility

In Endicott Constructors Corp. v. E. Amanti & Sons, Inc., No. 1:14-CV-12807-LTS, 2017 WL 3028877 (D. Mass. July 14, 2017), the plaintiff-subcontractor Endicott Constructors Corp. (“Plaintiff”) filed a lawsuit claiming breach of contract and quantum meruit against the defendant-general contractor E. Amanti & Sons, Inc. (“Defendant Contractor”) on a construction renovation project at a Veterans Affairs building in Bedford, Massachusetts. Plaintiff also brought a claim against Safeco Insurance of America (“Defendant Surety”) pursuant to the Miller Act, 40 U.S.C. § 3133.  The two Defendants moved for summary judgment against Plaintiff's claims. The District of Massachusetts granted the motions. Plaintiff is now appealing the decision to the First Circuit.

Though factually detailed, the decision serves as a review of numerous key concepts in construction law including the requirement of strict performance to recover on a contract breach, requirement of substantial performance to recover under quantum meruit, cardinal change, necessity of expert testimony, contractual notice provisions, and tolling applicable to the Miller Act statute of limitations.

• The Court held that Plaintiff could not, as a matter of law, show "complete and strict performance of all its terms" because Plaintiff walked off the project with 1/3 of the subcontract to complete, and therefore could not recover on the contract itself.  

• Moreover, in addition to walking off the job, Plaintiff acknowledged, inter alia, that it performed defective work and did not pay federally-required wages.  Accordingly, the Court concluded that the Plaintiff, as a matter of law, "did not substantially perform its contract obligations" which extinguished its claim for "quantum meruit" as well.

• To avoid this harsh result on its contract-based claims, Plaintiff argued that a "cardinal change" had occurred excusing its performance.  The Court hesitated to confirm that Massachusetts has adopted this doctrine, but in any event, held that the elements of a cardinal change were not present. The Court observed that there must be "alteration in the work [effected by the government] so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for."  Here, because Plaintiff only pointed to the government adding supervisory personnel to its payroll and a large number of change orders, the Court was not persuaded that Plaintiff's scope was "drastically altered." Indeed that court emphasized that, In re Boston Shipyard Corp., 886 F.2d 451, 456 (1st Cir. 1989) the court had held that even 86 change orders was not sufficient to show a cardinal change to construction contract.

• With respect to Plaintiff's extended time claim, the Court, in dicta, questioned whether an expert is required to prove such a delay claim, but also noted that Plaintiff's failure to do so may be at its peril as it had not presented a "coherent analysis" to allow a factfinder to could find in its favor.

• Adding to Plaintiff's challenges, it failed to present evidence that it had given notice of its claims within 7 days as required by the contract. The Court, without delving into whether the defendant was prejudiced by the delay, succinctly held that failure to comply with the contractual provision "will generally preclude all relief."

• With respect to the Miller Act action that Plaintiff filed on the bond provided by Defendant Surety, the Court was not persuaded that presence of Plaintiff's trailers on the construction site would extend limitations period.  The Miller Act requires that any action on the bond must be brought within one year of the "last of the labor was performed or material was supplied" by the contractor or supplier bringing the action.

If the First Circuit has an opportunity to weigh in, the law in these areas, as recounted above, may be further honed by its decision. If so, we will update this blog.

---------------------------------------
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.

General Contractor Prevails: Subcontractor’s Demand for Payment Dismissed

The Massachusetts Appeals Court affirmed summary judgment in favor of a general contractor in the matter Acme Abatement Contractor, Inc. v. S&R Corporation.  The general contractor, S&R Corporation, hired an asbestos abatement subcontractor, Acme, to demolish and remove materials from a water treatment plant and ball field.  The linchpin issue was whether the subcontract required the paint removed from a section of the bleachers at the ball field.

The subcontractor claimed that there was no asbestos in the paint therefore removing the paint was outside the scope of its contract.  It refused to do that work.  As a result, the general contractor was forced to hire another contractor.  When the subcontractor demanded payment for the work it had completed, the general contractor refused and did not pay the subcontractor anything.  The subcontractor sued.

The general contractor proceeded to summary judgment on two bases.  First, it argued that the subcontract had assumed that all paint contained asbestos and therefore the subcontract’s scope necessarily included removing the subject paint. Then the general contractor argued if there were disputes about scope, per the contract terms, the subcontractor was required to do the work and then litigate the scope later: 

"In the event of any dispute, controversy or claim between the Contractor and the Subcontractor, the Subcontractor agrees to proceed with the Work or extra work without delay and without regard to such dispute, controversy, claim or the tendency [sic] of any proceeding in relation to the same. The failure of the Subcontractor to comply with the provisions of this paragraph shall constitute a material breach of this agreement. . . ."

Because the subcontractor refused to perform the disputed work, general contractor asserted that the refusal was a material breach and it was justified in not paying the subcontractor for any work.  The appellate court agreed with this second argument.

The subcontractor attempted to counter that even if it breached by not doing the subject work, under a theory of quantum meruit, it still was entitled to payment for the work it did perform.  The appellate court disagreed holding that because the subcontractor "intentional[ly] depart[ed] from the contract in a material matter without justification or excuse," its claim for recovery under quantum meruit was precluded.

-----------------------------

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.

Sub Wins Against Owner -- It Was A Strategic Decision Not To Sue The GC

In South County Post & Beam, Inc. v. Brian T. McMahon, et al. ("McMahon"), the Rhode Island Supreme Court affirmed an "unjust enrichment" claim by a subcontractor against an owner.  The case is a cautionary tale for owners and will likely become a frequently cited case for subcontractors seeking multiple avenues for payment.

To avoid a "surprise" unjust enrichment cause of action by subcontractors, and particularly following this case, some takeaways for owners include:

• Do communicate solely through your general contractor. 
• Don't issue direct payment to subcontractors as a courtesy to the general contractor.  
• Don't negotiate directly with subcontractors regarding billing/commercial terms.  
• **Be careful about direct email communications with subcontractors** 

Contractors, whether a general contractor or a subcontractor, who deal with difficult owners could possibly lay the groundwork for such a quasi contract claim by engaging in these activities and direct owner/subcontractor communications.  The case creates precedent for the proposition that it is not necessarily inequitable for a general contractor and a subcontractor to purposefully collaborate to avoid lawsuits between themselves so that the sub/general business relationship remains strong.  

The Facts: A family buys undeveloped property on Block Island, Rhode Island with the intention to build a house. Family hires general contractor. General contractor hires a roofing subcontractor.  During construction, the family decides to build a "barn" for their children and, later on, a roof deck on the house.  No change order was issued for the roof deck. Subcontractor received three payments -- one of which was a direct payment from the family (at the request of the general contractor).  There was also some email correspondence between subcontractor and the family regarding subcontractor's billings. 

Lawsuit Against the Family: Subcontractor sued family for breach of contract (express and implied) and unjust enrichment.  Subcontractor did not sue general contractor because it did not want to disrupt the existing business relationship.  (The family didn't file a third party indemnification claim against the general contractor.) 

Contract Cause of Action -- Family Wins: Trial Justice found there was no express or implied contract, and therefore, entered judgment for the family.

Unjust Enrichment -- Subcontractor Wins: Despite the absence of a contract and the subcontractor's strategic decision not to sue the general contractor, the Trial Justice found that it was equitable to enter judgment for subcontractor against the family on the unjust enrichment claim. 

On appeal, the Rhode Island Supreme Court first set forth the elements of a claim for unjust enrichment:

It is well settled in our state that, '[t]o recover for unjust enrichment, a claimant must prove: (1) that he or she conferred a benefit upon the party from whom relief is sought; (2) that the recipient appreciated the benefit; and (3) that the recipient accepted the benefit under such circumstances that it would be inequitable for [the recipient] to retain the benefit without paying the value thereof.'

McMahon, at *8, quoting Emond Plumbing & Heating, Inc. v. BankNewport, 105 A.3d 85, 90 (R.I. 2014) (emphasis added).  Next, the Court explained that, under Rhode Island law, the causes of action for unjust enrichment and quantum meriut were essentially the same.  "'While unjust enrichment focuses on the propriety of a payee or beneficiary retaining funds or a benefit, quantum meruit's primary focus is on the value of services rendered.'" McMahon, at *8, citing Process Engineers & Constructors, Inc. v.DiGregorio, 93 A.3d 1047, 1052 (R.I. 2014). (Presumably, the Court engaged in this discussion because the proof of damages related the value of the services rendered rather than the "benefit" conferred on the family by the subcontractor's work.)

The Supreme Court framed the issue as "whether [the family] would be unjustly enriched if they did not have to compensate [subcontractor] for the value of the services rendered, and not whether it would actually be proper for [the family] to retain the benefit of plaintiff's work on their new house and barn." McMahon, at *10.  Despite precedent stating that "'[s]imply conferring a benefit upon a landowner by a subcontractor is not sufficient to establish a claim for unjust enrichment[,]" McMahon, at *11, quoting Emond Plumbing & Heating, Inc. v. BankNewport, 105 A.3d 85, 90 (R.I. 2014), the Court "balanced the equities" to determine whether subcontractor could recover directly from the family.  The following were the facts considered by the Court:

Facts Weighing Against A Claim For Unjust Enrichment

• Existence of a Subcontract and lack of contract (even implied) with the family. This was a "factor that weigh[ed] against [subcontractor] recovering the value of its work from [the family." McMahon, at *11.  
• Not pursuing recovery against General Contractor. This fact should strongly make an unjust enrichment claim against the family unsuccessful.  Here, subcontractor surprisingly admitted to the Trial Justice that the subcontractor "had made a strategic decision not to include [the General Contractor] as a defendant in its civil action because it wanted to continue working with [the General Contractor] in the future." McMahon, at *12, fn. 2.  

Facts Weighing In Favor Of A Claim Of Unjust Enrichment

• Family made one $60,100 payment to subcontractor.  It was undisputed that this was done as a courtesy to the general contractor.  
• Family and subcontractor exchanged emails. The emails dealt with the subcontractor's billings and statements.  

The Court held "the trial justice was not incorrect as a matter of law in her analysis and conclusion that the third element of plaintiff's claim was met."  

The family's counsel argued that this case could "render every property owner a de facto party to subcontracts executed by the general - the general and sub could substitute the homeowner as the obligor at their whim, at any time, without notice." McMahon, at *14. While recognizing this policy argument, the Court discounted it because an "unjust enrichment" claim involves a "fact-specific balancing process." McMahon, at *14. In so holding, the Court has substantially widened the "door" for such direct claims by subcontractors against owners and made it more challenging to dispose of such actions through the summary judgment process.  

The Dispute Resolver editors look forward to hearing from you about this case.  Please post your comments on our blog or LinkedIn Subgroup page.  This case summary was prepared by Tom Dunn, a Partner at Pierce Atwood's Providence, Rhode Island office and Co-Editor of The Dispute Resolver. Tom can be reached at rtdunn@PierceAtwood.com or @rtomdunn.  

Standards of Proof for Quantum Meruit Actions: Process Engineers & Constructors, Inc. v. DiGregorio, Inc., (R.I., July 1, 2014)

In Process Engineers & Constructors, Inc. v. DiGregorio, Inc., No. 2013-87 (July 1, 2014), the Rhode Island Supreme Court affirmed a judgment awarded to a sub-subcontractor following a bench trial. 

The case is helpful because it provides standards of proof under Rhode Island law for quantum meruit claims often brought in construction disputes.  The two points are:

1. A plaintiff need only prove it was not at fault for the changed condition (not need to prove cause).
2. No expert testimony is required to prove the costs incurred were "fair and reasonable."  Proof of the value of the services is sufficient.

At trial, the sub-subcontractor plaintiff sought to recover against the party with whom it contracted (the subcontractor) $316,000 based upon extra work performed.  Plaintiff brought breach of contract and quantum meruit causes of action.  The trial justice found that the plaintiff did not satisfy its burden of proof on the breach of contract claims for failure to follow the change order requirements of the contract. 

On its quantum meruit recovery, plaintiff sought to recover for three categories: (1) change order work, (2) increased bond premium charged due to increased contract amount, and (3) additional costs due to replacing a pipe caused by wet insulation. 

As to the first item (unallocated change order work), the trial justice held that the plaintiff failed to meet its burden of showing that a benefit was conferred on defendant and that the defendant accepted the benefit.

The trial justice found in the plaintiff's favor as to the increased bond premium and wet insulation extra work item.  Specifically regarding the wet insulation item, the trial court found that the loss was not due to the sub-subcontractor's action because it was not responsible to dewater the trenches that became wet. 

In its appeal, defendant contended  the evidence presented by the plaintiff was insufficient because the plaintiff did not prove defendant was responsible for the wet insulation.  The Supreme Court framed the issue and its holding as follows:

Whether [plaintiff] only had to prove that it was not responsible for the loss or whether [plaintiff] also had to prove what caused the loss. We hold that [plaintiff] was required to prove only that it was not at fault for the loss; it did not need to prove who was at fault." Emphasis added.

The second issue on appeal concerned the requisite proof that services rendered were "fair and reasonable" for quantum meruit recovery.  Here, the Court shifted the burden on the defendant to establish the claimed charges and costs were unreasonable.  Citing Bruner & O'Connor, the Supreme Court stated:

For purposes of the prima facie case, a plaintiff need only submit evidence of the value of the services; the factfinder is permitted to infer that the charges are fair and reasonable. A plaintiff is not required to put forth expert testimony on the reasonableness of the value of the services during his or her prima facie case. If a defendant wishes to contest the fairness or reasonableness of the value asserted by a plaintiff, the burden shifts to the defendant to prove that the charges were unreasonable. Emphasis added.

The Supreme Court did not explain what level of proof is required for a defendant to establish charges were not "fair and reasonable" or whether expert testimony would be required.  On the specific facts of the case, the Court found that the defendant simply failed to challenge the reasonableness of the costs .  It stated, "[defendant] did not challenge the hourly rates, the number of hours worked, the costs of materials, or the charges for equipment."