Irreconcilable Differences and the Right to Cure (Terminating Construction Contracts - Part 1)

In this series we will provide a brief summary of a very complex topic: the termination of construction contracts. Termination should be a last resort on a difficult construction project. There are a myriad of reasons why termination can backfire if not executed carefully and thoughtfully.

This series will scratch the surface of selected legal issues arising from contractual terminations. Although much of this analysis is from the perspective of an owner, we hope the discussion will also be of use for other parties, including design professionals, general contractors and subcontractors.

Complex construction projects can be long, difficult and frustrating endeavors. Inevitably, things go wrong. Delays happen, unforeseen circumstances arise and costs increase. After months of interaction both on-site and during project meetings, personalities clash and patience wears thin. 

In this charged atmosphere with large amounts of capital at risk, it can be tempting to consider the merits of terminating certain contracts. As we counsel our frustrated clients regarding the potential benefits of termination, and more importantly the potential pitfalls and liabilities that could end up in protracted litigation or arbitration, sometimes the best service we can provide is simply letting an exasperated client blow-off steam while reminding them to maintain written records of project-related communication and a back-up set of all project documents. Termination may sound viable in the heat of the moment, but it is hardly a decision that should be made without careful planning and detailed scrutiny of all the legal and practical implications. 

Irreconcilable Differences and Practical Considerations

Unfortunately, certain differences are irreconcilable. In these circumstances, termination may be the only viable option to finish a project. However, even when a material breach occurs, clients should be counseled regarding several important practical considerations before even reaching the litany of legal concerns.

For example, even assuming an owner has the right to terminate a contractor for cause, the owner may not have an adequate replacement ready to assume the remaining contractual obligations. Or perhaps the owner has a replacement, but in order to assume the remaining obligations and walk onto the project and accept the risks of “cleaning up someone else’s mess,” the replacement is prohibitively expensive. In these scenarios, the termination “medicine” may be worse than the “disease” of maintaining a difficult relationship with an underperforming party.

A second critical decision is whether a client wants to deal with the stress and expense of mediation, arbitration or litigation. Further, the client should be advised to consider termination in the context of its relationship with the lender. Because construction projects are capital intensive, lenders may retain leverage, literally and figuratively, over significant project details. Making a unilateral decision without considering the lender is rarely a good idea.

Materiality and Termination For Cause

The law generally disfavors termination. Termination is a drastic remedy and the law has developed several hurdles before a party can justify terminating a contract for cause. First, the breach must be material. Second, the breach must be not be excused. Third, the breach must have been neither cured nor waived.

Many modern construction contracts contain “breach conversion” provisions. These powerful devices convert breaches from breach of contract claims into claims for relief under the contract. Breach conversion clauses may address common issues such as changes, owner’s misrepresentation of site conditions or suspension of work.

Not all breaches are material. While a material breach may provide grounds for a for cause termination, defining the outer limits of materiality is notoriously complicated. Hopefully the contract documents are detailed enough to provide specific guidance regarding triggering events, cure provisions and compensation. Contractual termination clauses are usually the starting point of the analysis.

Most standard form contracts appoint the architect or another design professional as the “Initial Decision Maker” pursuant to their construction administration responsibilities. The Initial Decision Maker essentially acts as the earliest referee of the formal dispute process. They may be forced to consider for cause grounds for terminations including defective work, excessive delays, the non-payment of subs or insufficient labor on-site. Another example may be determining when a work stoppage amounts to abandonment. Nothing can be more frustrating than a work-stoppage when a project is already behind. However, clients should be counseled that a court may not agree that a given work stoppage amounts to abandonment.

The stakes of deciding to terminate a contract due to a material breach are high. If an owner makes the wrong decision, they can open themselves up to significant liability. It goes without saying that an owner’s wrongful failure to pay is itself a material breach. Wrongful termination can lead to the discharged party receiving lost profits and other damages. In many jurisdictions, a bad faith termination can lead to extracontractual damages.

The Right to Cure

Even when a breach has occurred, most standard contract documents will provide important limitations on the right to terminate. One of the most significant limitations is the right of a breaching party to cure any material breaches capable of being remedied.

The right to cure provides the breaching party with the opportunity to address their mistakes. Sometimes this isn’t practical for logistical reasons, but the legal principle is important. For example, most jurisdictions won’t let a landlord evict a residential tenant without notice of default and other legal safeguards developed over time. The same basic concept applies to construction contracts. The right to cure is a common law concept grounded in the equitable principle that notice is an element of fairness and can promote the informal resolution of disputes.

A “cure notice” must be given by the non-breaching party. There are only limited exceptions to this general rule, including when a material breach clearly cannot be cured in time. Most standard form construction contracts will clearly specify that a cure notice must be given by the non-breaching party prior to termination. Independent of the explicit contractual language, courts usually find that unless expressly waived, a right to cure is implied in every construction contract as a matter of law.

The cure notice must adequately apprise the breaching party of the specific failures which, if not remedied, may lead to termination.

Providing cure notice is an essential prerequisite to a valid termination. If the contractor fails to cure or otherwise provide adequate assurances that it will do so within a reasonable period, the architect of record may certify that sufficient cause exists for termination.

But wait, there’s more. Waiver, mitigation and other defenses will be the topic of Part II of this series.  

Author Patrick McKnight is an associate in the Litigation Department of Fox Rothschild LLP. He can be reached at pmcknight@foxrothschild.com.

Don’t Mess with Texas: 5th Circuit takes Litigators Back to Law School

 In the recent decision of Sayers Construction, L.L.C.v. Timberline Construction, Inc. and High Voltage, Inc., the Fifth Circuit affirmed a federal district court’s determination that it did not have jurisdiction to vacate an arbitration award in Florida. 976 F.3d 570 (5^th Cir. 2020). The court reminded us that jurisdiction really is power, just like lawyers everywhere learned in their very first civil procedure class in law school. After walking us through the trodden legal framework of Pennoyer, International Shoe, World-Wide Volkswagen, and Burger King, and hinting at the liberal policy of promoting arbitration, the court concluded, “this is Florida’s problem. Not Texas’s.” Sayers Construction, 976 F.3d at 574.

The case serves a friendly reminder of the importance of jurisdiction, especially in the context of arbitration. In this case, the Texas-based general contractor sought to vacate a Florida court’s enforcement of a Florida-based arbitration award. See id. at 572. Step one of the court’s analysis highlighted the most well-known limitation of the Due Process Clause when it comes to jurisdiction of out-of-state defendants: that of “minimum contacts.” See id. at 573. The court pressed that we must always ask whether our counterparts “purposefully avail[ed] [themselves] of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” See id. (citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297-98 (1980)). Here, the general contractor defendant pressed that this was a standard breach of contract dispute where “minimum contacts” existed because (1) subcontractors solicited a business relationship with the general contractor in Texas, (2) the subcontractors contracted with the general contractor, which has an office in Texas, (3) subcontractors mailed invoices to general contractor’s office in Texas, and (4) the parties’ contract has a Texas choice-of-law clause. Id. The court found that none of these facts established “minimum contacts.” Importantly, in response to facts (3) and (4), the Fifth Circuit held that, mailing payments, especially when all of the work is performed outside the state, is insufficient to establish “minimum contacts” and choice-of-law clauses are probative, but not dispositive, of purposeful availment. See id. at 574.

With its terse ‘this is not our problem’ ending, the court emphasized that any doubts as to the legitimacy of arbitration should be put to bed. Case law, in conjunction with the Federal Arbitration Act (“FAA”), makes clear that there exists a liberal policy of promoting arbitration, thus making arbitration agreements “valid, irrevocable, and enforceable.” 9 USC § 2. As we all know, arbitration is favored amongst many construction clients due to its privacy, speed, and finality. But with every decision comes a cost. In agreeing to arbitrate, the cost to parties is the relinquishment of much of their right to a court’s decision. Parties may still seek court review of an arbitrator’s decision, but the courts will set that decision aside only in very unusual circumstances. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). In fact, grounds for vacating arbitral awards are few and far between[1] – and if you’re still not convinced of just how rigorously courts enforce arbitral awards, consider the fact that the Manifest Disregard of Law Doctrine remains one of the few proper grounds of vacatur of an arbitral award and there exists a circuit split as to whether even that is proper. See Philip D. O’Neill, Jr., International Commercial Arbitration 459 (2012).

In conclusion, the case of Sayers Construction, 976 F.3d at 574, is a reminder to experienced lawyers not to lose sight of either the legal frameworks of personal jurisdiction or the FAA. And, of course, litigators everywhere beware: don’t mess with Texas.

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[1] Per the New York Convention on the Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”) and the Federal Arbitration Act (“FAA”), courts are directed to confirm arbitral awards unless it is found that there exist grounds for refusal or deferral of recognition. Those grounds include 1(a): incapacity of a party; invalidity under the law to which the parties subjected their agreement, or invalid under the law of the country where the agreement was made; (b) lack of proper notice; an inability by a party to present their case; (c) exceeding the scope of the arbitral agreement; (d) composition of the arbitral authority or process was not as the parties agreed; (e) set aside by a competent authority or in accordance with the law of the arbitral seat; (2)(a) the subject matter may not be lawfully resolved under the law of the place of enforcement; or (b) contrary to the public policy of that jurisdiction. In short, the legal framework and the New York Convention (Article V) provides that the decision to decline to enforce an award is a matter of stringent discretion, for “recognition and enforcement of the award may be refused,” but only very limited circumstances. See Philip D. O’Neill, Jr., International Commercial Arbitration 405-06 (2012).

Author Lexie R. Pereira is a third year J.D./M.B.A. candidate at Boston College Law School and Carroll School of Management, studying to become a litigator, with a specialty in construction law. Currently, she works as a Law Clerk at Consigli Construction Co., Inc., serves on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog, and acts as the 2020 Student Liaison of the ABA's Forum on Construction Law. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Lexie grew up in the construction industry and has spent time working as an estimator, field engineer, laborer, and, of course, in the legal capacity at Consigli and formerly Hinckley Allen as a Summer Associate. 

Contact Lexie: pereirle@bc.edu | https://www.linkedin.com/in/lexie-pereira/

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.

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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.

Pay-if-Paid Enforced Opening Door to Subcontractor Claim Against Owner

 

https://libeskind.com/work/the-ascent-at-roeblings-bridge/

In Superior Steel, Inc. v. Ascent at Roebling's Bridge, LLC, No. 2015-SC-000204-DG, 2017 WL 6380218 (Ky. Dec. 14, 2017), a subcontractor and a sub-subcontractor sued the general contractor and owner for the failure to pay for extra work. The general contractor and owner cross-claimed against the other for, inter alia, indemnification.  At the jury trial, the subcontractors recovered under theories of implied contract and unjust enrichment.  All parties appealed, in particular, as to the pay-if-paid jury instruction. The Court of Appeals vacated the judgment and remanded.  In turn, all parties petitioned to the Supreme Court of Kentucky.

 

The key questions in the petition were whether the pay-if-paid provision was enforceable as between the general contractor and subcontractors and, if so, whether the subcontractors could pursue the owner directly for payment notwithstanding the lack of privity between owner and subcontractors.

 

The Supreme Court concluded that, as a result of the pay-if-paid clause, the general contractor had not breached subcontract for the failure to pay for the subcontractor's extra work.  The relevant subcontract provisions stated:

• "no compensation . . . for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved"
• And more directly - "payment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work."

Reading these together, the Supreme Court agreed that the general contractor's receipt of payment from owner was a condition precedent to its obligation to pay the subcontractors.  Because the general contractor did not receive payment from the owner, there could be no breach. The Court did note that "pay-if-paid clauses have fallen out of favor in some states, [but] the prohibition against their use has come from the legislature rather than the courts." In Kentucky, no such statutory prohibition existed.

 

However, because the subcontractors were left with no useful contract remedy against general contractor, the Court held that the subcontractors were not barred from bringing unjust enrichment claims against the owner.  The Court acknowledged that typically “unjust enrichment is unavailable when the terms of an express contract control.”  But noted that, here, the "adequacy" of a "legal remedy" (or the "actual realization of that contractual remedy") was absent due to the "contractual gridlock" caused by the owner.  Indeed, if the contract was the only avenue for the subcontractors to obtain relief, that result would allow the owner to take advantage of its own failure to pay after receiving "a substantial benefit" from the subcontractors' work.

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 

 

Risky (shifting) Business: Pay-if-Paid Provision Enforced to Subcontractor's Detriment

In Baker Concrete Const., Inc. v. A. Pappajohn Co., No. FSTCV166028187S, 2017 WL 4106383, at *1 (Conn. Super. Ct. 2017), at issue was the age-old dispute of non-payment for work performed.

The Baker Court first recounted the direct avenues for collecting on a construction project when payment is not made in the regular course: "[A] mechanic's lien may be available, and in connection with public works projects, a payment bond is statutorily required given the unavailability of a mechanic's lien in such projects."   That said, "[d]epending upon the equity in the property . . . a mechanic's lien may be insufficient (especially if a project has been financed with a mortgage placed on the property as a first lien)." Even with these direct avenues along with filing suit, insolvency of the parties in the project chain can thwart any collection efforts of the lower tier contractors.  In addition, contractual language, for example a pay-if-paid provision, too can arrest an unpaid party's effort to be paid. The Baker Court considered the requirements for applying such provisions. In Baker, the general contractor-subcontractor contract stated, in pertinent part, that:

Progress payments to the Subcontractor for satisfactory performance of the Subcontractor's Work shall be made only to the extent of and no later than ten (10) working days after the receipt by the Contractor of payment from the Owner for the Subcontractor's Work. The Subcontractor agrees that the Contractor shall be under no obligation to pay the Subcontractor for any Work until the Contractor has been paid by the Owner . . . The Subcontractor expressly acknowledges and agrees that payments to it are contingent upon the Contractor receiving payments from the Owner.

By its plain language, this pay-if-paid provision appeared to foist all risk of the owner's potential insolvency onto the subcontractor.  For its part, the subcontractor argued that "the provision is a timing issue (or should be interpreted and applied as such) rather than a risk-shifting provision." In other words, notwithstanding that the general contractor was not paid by the owner in a reasonable period of time after the work was performed by the subcontractor, the subcontractor was still entitled to be paid.  The court disagreed.

After disposing of a burden of proof argument raised by the subcontractor, the Baker Court resolved the contract interpretation question. It examined the caselaw and observed that where the provision does not explicitly "creat[e] a condition precedent to payment" the courts will construe the provision as "setting the time of payment" rather than establishing a defense to payment. However here, the contingency was explicit and moreover the contract provision also put the risk of insolvency explicitly onto the subcontractor: "The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work. The Subcontractor states that it relies primarily for payment for Work performed on the credit and ability to pay off the Owner and not of the Contractor[.]"

In light of the foregoing the Baker Court held that there was no ambiguity in the terms and therefore the contract's pay-if-paid provision would be enforced as written.  The court summed up the reality of working in the construction industry (and frankly any industry): "It is clear that the defendant [contractor] took advantage of its superior bargaining position in this contract; the plaintiff [subcontractor], however, seemingly made a conscious decision to [get the job by] sign[ing] a contract containing this risk-assumption provision which, in these unfortunate circumstances, has come into play."

As an aside, observe that Connecticut's statutory prompt payment provisions do not preclude contractual pay-if-paid clauses. See Conn. Stat. 42-158i et seq.

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. 

Fees to the Prevailing Party: Tennesse and the American Rule

I’Ashea Myles-Dihigo
Hagan Law Group, PLLC

Tennessee generally follows the American Rule regarding the payment of attorneys’ fees, which permits the recovery of fees in very limited situations. Many clients are disappointed when they win their case but still have to pay their attorney’s fee.

 

Contractual provisions, which provide for attorneys’ fees, have become a regular practice in contract drafting to hedge against the outcome of American Rule for the prevailing party.  These provisions are a very important consideration for construction industry clients and were the discussion of a recent Tennessee Court of Appeals case.

 

In Barrett v. Ocoee Land Holdings, LLC the Court strictly construed the terms of the parties’ construction contracts regarding a claim for an award of attorneys’ fees.  In that case, the homeowners sued the homebuilder, real estate developer, and other individuals involved in those entities related to the purchase of, and planned construction of a house on a lot in a subdivision.  The homeowners sued under various theories including breach of contract, civil conspiracy to commit wrongdoing, the Consumer Protection Act, and the Fraudulent Conveyance Act.  The case was tried before a jury, and the homeowners lost their claims.  There was a provision in the contract between the homeowners and defendants, which provided an award for attorneys’ fees for the prevailing party.  The jury never heard any proof about the attorneys’ fees, and there was no space on the jury verdict form for an award of fees.  The trial court reserved the issue of fees and ultimately denied defendants’ claim for an award of attorneys’ fees and expenses.

 

The defendants appealed the decision of the trial court, and the Court of Appeals reversed.  The Court of Appeals held that, “Tennessee allows an exception to the American Rule where the contract specifically or expressly provides for the recovery of attorneys fees.” The Court went on to explain that the litigation between the parties fit the exact situation contemplated by the fee provision, as the parties contract stated that they “agree to an award of reasonable attorney’s fees and expenses to the prevailing party in litigation ‘arising out of [the] Contract.”  Based on the terms of the contract, the defendants were ‘each entitled to the enforcement of their contractual right to recover reasonable attorney’s fees and expenses’ under the ‘plain terms of the attorney’s fee provision.’”

 

So, at least in Tennessee, those prevailing party fee provisions in construction law contracts are very important to the outcomes in litigation as an exception to the American Rule.

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The author, I'Ashea Myles-Dihigo, is a contributor to The Dispute Resolver and Of Counsel Attorney with Hagan Law Group, PLLC based in Murfreesboro, TN.  She may be contacted at 615.546.4066 or iashea@hanganlg.com.

Contractors Exposed to Copyright Liability Where Owner Breaches Agreement with Architect

A federal court in the case Eberhard Architects, LLC v. Bogart Architecture, Inc. et al., 314 F.R.D. 567 (N.D.Ohio 2016) recently held that contractors and subcontractors cannot, as a matter of law, avoid liability if an owner uses an architect's plans and drawings without a license.

In Eberhard, the Architect entered into an AIA contract with the Owner to provide architectural services in connection with the design of a 12-bed hospital facility.  Per the contract the Architect granted the Owner a "nonexclusive license" to use its plans and drawings, the "instruments of service," for the hospital project unless Owner failed to make payments.  In such instance, the contract stated that the license in favor of the Owner would be cancelled.

When the Owner failed to make payment to the Architect, the Architect issued cease and desist letters to all project participants - Owner, Contractor, Subcontractor - to stop using its instruments of service as they were protected by copyright law.  The Contractor and Subcontractors, who did not have a contractual relationship with the Architect and who did not have a basis in their contract with the Owner to stop work, continued to use the drawings and plans.  The Architect then filed a lawsuit against all project participants.  The Contractor and Subcontractors moved to dismiss. The federal court denied the motion.

The Contractor and Subcontractors first argued that case did not “arise” under the Copyright Act and was really a contract dispute concerning nonpayment of fees. The court disagreed holding that the complaint sounded in infringement by Contractor and Subcontractors and therefore arises under the Act. The court commented that it did not matter that the Defendants would raise an affirmative defense that they were not infringers in light of the nonexclusive license.

Then the court likewise discarded the arguments from the Contractor and Subcontractors that they did not exceed the scope of the license because the instruments of service were used on the exact project that the architect had intended.  According to the Contractor and Subcontractors, the Owner did not breach its agreement with the Architect (entitling the Architect to withdraw the license in full) because complete payment was not a condition precedent to the Owner-Architect Agreement.  The court pointed out that the Architect-Owner contract granted the license “upon execution” and "therefore, by granting the license before full payment was due, the parties clearly did not intend the full payment to be a condition precedent to the license itself." And furthermore, by agreement of the parties, the license indeed "ceased to exist" upon the architect's rightful termination of which non-payment was rightful reason. In sum, the Owner and Architect had agreed that the license  would be extinguished.Accordingly, by proceeding to use the instruments of service without a license all project participants, including the Contractor and Subcontractors, were potentially liable under the Copyright Act.

Beyond this case--where, in light of the cease and desist letters, the Contractors and Subcontractors arguably were aware that the license was potentially expired--it is important to note that civil violations of the Copyright Act need not be willful or knowing. See generally R. Anthony Reese, Innocent Infringement in US Copyright Law: A History, 30 Colum. J.L. & Arts 133 (2007).  As such, contractors and subcontractors who use plans and drawings that are unlicensed, whether they know so or not, may expose themselves to liability.

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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.

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.

Forum's Upcoming Meetings -- Construction Contracts (2/26 and 3/4) and Annual Meeting (4/28-30)

The American Bar Association Forum on Construction Law presents its annual Regional Program, entitled Construction Contracts: Finding Common Ground in Drafting and Negotiating Design and Construction Clauses.

These programs will provide an in-depth topic-by-topic discussion of key design and construction contract terms and conditions, including a comparison of forms and agreements from the AIA, the EJCDC, and ConsensusDOCS.  Programs will be live in Jacksonville, FL, Los Angeles, CA and New Orleans, LA on February 26, 2016; and live in Charlotte, NC, Indianapolis, IN and Newark, NJ on March 4, 2016.

Brochure: http://bit.ly/1RiQwwp

Register: http://bit.ly/1IZshk9

Jaimee Nardiello, Buck Beltzer, and Chris Dunn are going to put together a great Annual Meeting in Nashville, TN.  Save the date - April 28-30, 2016. Also, remember to book your hotel room in the Omni Nashville.

2016 marks the 40th anniversary of the ABA Forum on Construction Law and we welcome you to Nashville, TN — Music City USA, to celebrate this milestone! The festive, growing city of Nashville, home to the Grand Ole Opry and the Country Music Hall of Fame, is the perfect place to mark this incredible occasion.

Here is a link to the program brochure: http://bit.ly/1P1EHFa

#FCL40years #ABAConstruct