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New York District Court Upholds Termination of Vendor on Grounds of Insufficiency of Offer of Cure
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Sinco, Inc. v. Metro-North Commuter Railroad Co.,
99 Civ. 10631 (AKH), 2001 U.S. Dist. Lexis 1986 (S.D.N.Y. March 1, 2001)
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| The district court considered whether a tender so defective as to undermine the buyer’s confidence in seller’s ability to cure renders the seller’s attempts to cure futile. The court declined to adopt the “shaken faith” or “loss of confidence” doctrine to relieve the buyer of a fall protection system for the safety of its workers from its contractual duty to accept the seller’s attempted cure. Ultimately, however, the court granted summary judgment to the buyer after finding the seller’s attempts to cure were ineffective.
The dispute arose from the renovation of Grand Central Terminal by the Metro-North Commuter Railroad Co. (“Metro”). Because the renovations posed a great safety risk to the maintenance and renovation workers involved, Metro requested bids for a fall protection system for its workers on the project. Metro accepted the bid of Sinco., Inc. (“Sinco”) to construct a reliable fall protection system for $197,325. The contract emphasized the importance of the reliability of Sinco’s product.
Sinco installed its fall protection system involving harnesses worn by Metro workers. During a training session of Metro’s employees by Sinco, part of the harness system fell apart in the hands of a Metro employee. Within two days, Sinco delivered to Metro two different types of replacement parts and a videotaped stress test on the parts. Metro rejected this attempt by Sinco to cure its defective performance. Sinco suggested various other methods to cure the defects of its product, all of which Metro rejected. Metro terminated its contract with Sinco and paid $323,685.99 to a replacement contractor to complete the fall protection system.
Sinco brought suit against Metro for breach of contract and Metro counterclaimed for the cost of its cover. The court applied New York’s Uniform Commercial Code to determine whether Metro was required to accept effective attempts to cure. Specifically, the court considered 1) whether New York courts would apply the “shaken faith” doctrine to render all attempts to cure futile; 2) whether Sinco’s attempt to cure was effective; and 3) whether Sinco’s suggestions for cure constituted attempts to cure.
The district court determined that, under New York law, the “shaken faith” doctrine does not relieve a buyer of its duty to accept effective attempts by a seller to cure a defective tender. The court emphasized that both fairness and specific contractual language obligated Metro to provide Sinco the opportunity to cure defective performance. The court found no basis under New York law to allow Metro to terminate the contract without allowing Sinco an opportunity to cure, despite the lingering misgivings of Metro employees as to the reliability of the fall protection system.
However, the court held Sinco never offered Metro an effective cure obligating Metro to accept Sinco’s performance. Because Sinco contracted to provide a demonstrably reliable fall protection system, the court determined that Sinco had not only a duty to provide a reliable system, but also, to demonstrate its reliability. The court found the video-taped stress test performed by Sinco did not constitute objective evidence of reliability and that Metro rightfully rejected this attempt by Sinco to cure. Moreover, the court determined that mere offers by Sinco to cure employing various methods did not constitute acceptable attempts to cure, which could only be effected by putting “a fall protection system and proof of its reliability at Metro-North’s disposition, leaving it to Metro-North to accept the tender.”
Having found that Metro justifiable rejected Sinco’s ineffective tender, the district court granted summary judgment in favor of Metro.
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New York District Court Holds Partial Lien Waivers May Be Avoided on Grounds of Duress
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Worth Constr. Co. v. I.T.R.I. Masonry Corp.,
2001 U.S. Dist. LEXIS 2144 (S.D.N.Y. Feb. 21, 2001)
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| Worth Construction entered into a masonry subcontract with ITRI Masonry for a correctional facility in New York. Due to cash flow concerns, ITRI requested and Worth acquiesced to an arrangement where Worth would pay ITRI’s actual payroll costs, but not payroll taxes or benefits, on a weekly basis. These costs would then be deducted from ITRI’s monthly progress payment. Nevertheless, ITRI began to fall behind in its payments to vendors and its workforce. Subsequently Worth began paying ITRI’s payroll and suppliers by joint check. Eventually Worth terminated ITRI for nonperformance on March 13, 1998 and hired all of ITRI’s tradesmen and supervisors to complete the masonry work.
During the project, ITRI submitted requests for payment twice a month, along with a properly executed Subcontractor’s Affidavit and Release of Lien. These releases were required by the subcontract. A total of thirteen of these releases were executed, the last dated Feb. 27, 1998. ITRI claimed the liens were executed because if they were not, it would not get paid. ITRI further claimed it was prohibited from altering the lien to protect its interests.
ITRI filed a lien against the facility on April 3, 1998, asserting the actual value of the work performed to be approximately $5 million, with an unpaid balance of approximately $2.5 million. Worth filed suit alleging ITRI had released all of its claims and in any event the claim of $2.5 million could not have arisen during the two-week period between the last lien waiver (Feb. 27) and the date of termination (Mar. 8). Worth moved for a summary judgment to dismiss the lien on the basis that ITRI’s valid releases barred future liens and ITRI’s lien was willfully exaggerated.
The district court held the releases were valid and enforceable as a matter of law. However, the court held that ITRI’s defense of duress raised a genuine issue of material fact. The court noted that a reasonable trier of fact could conclude that Worth agreed to a variance from the contractual pay procedures in order to cover weekly payrolls; that at some point Worth stopped paying ITRI monies due pursuant to the monthly requisitions; and that, to pay tradesmen and to avoid defaulting on its obligations, ITRI was forced to sign releases of claims for money that it had earned and requisitioned, but that Worth refused to pay. There was a question of fact about whether Worth threatened to breach its agreement by withholding performance (payment) until ITRI agreed to release any claim to money it was lawfully owed under contract. The court stated “it defies belief that ITRI would have agreed to work on the project for less than the amount specified in its written contract, or that it would have exposed itself to civil or even criminal liability for unpaid payroll taxes by voluntarily waiving its right to collect the money needed to pay those taxes.” Thus, there remained disputed facts as to whether ITRI was compelled to sign the releases; whether an opportunity to reserve rights under the releases was denied to ITRI, and whether any threats by Worth of withholding payment under that scheme prevented ITRI from exercising its free will.
Similarly, plaintiff’s motion to dismiss based on willful exaggeration of the lien was also dismissed. Since the validity of the releases was questionable, the valuing of the lien at $5 million might not be exaggerated.
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West Virginia Supreme Court Allows Contractor to Sue Engineer for Negligence and Breach of Warranty, but Not as Third-party Beneficiary
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Eastern Steel Constructors, Inc. v. City of Salem,
No. 28202, 2001 W. Va. LEXIS 3 (W. Va. Feb. 9, 2001)
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| The City of Salem, West Virginia, entered into a contract with Kanakanui Associates pursuant to which Kanakanui was to provide engineering and architectural services for improvements to Salem’s existing sewer system. Kanakanui produced plans and specifications to be used to solicit bids for the improvements. Eastern Steel Constructors, Inc. bid on a portion of the project relying on the plans provided by Kanakanui and was awarded the contract.
During construction, Eastern experienced delays caused by sub-surface conditions not disclosed by Kanakanui’s plans. Eastern also alleged that it incurred further damages caused by Kanakanui’s failure to manage the project properly. Eastern filed tort actions against Kanakanui alleging the following: (1) negligent performance of construction services; (2) breach of implied warranty of the plans and specifications; and (3) that Eastern was entitled to damages as a third-party beneficiary to the contract between Salem & Kanakanui.
The circuit court granted Kanakanui’s motion for summary judgment on all three theories. The Supreme Court of Appeals of West Virginia reversed the summary judgment on the first two counts, but affirmed the summary judgment on the third count.
The Court held that a design professional “owes a duty of care to a contractor who has been employed by the same project owner as the design professional and who has relied upon the design professional’s work product in carrying out his or her obligations for the owner, notwithstanding the absence of privity of contract between the contractor and the design professional, due to the special relationship that exists between the two.”
In determining whether a “special relationship” exists sufficient to impose a duty of care, the Court explained that each case must be determined on its own facts and that such a determination will depend heavily on “the extent to which the particular plaintiff is affected differently from society in general.” If, however, a special relationship is found to exist, purely economic damages may be recovered.
The Court recognized that other jurisdictions do not permit recovery for purely economic damages in negligence. The court, however, declined to adopt this rule and instead, set forth its approach allowing recovery of purely economic damages in cases of professional negligence. The Court justified its position on the grounds that: (1) the duty is owed only to a limited class; (2) a successful bidder is a foreseeable victim of any negligence; and (3) allowing recovery places the duty of care on the party who is in the best position to protect against damages resulting from design negligence.
The Court held that due to the existence of the special relationship between a design professional and contractor, a design professional impliedly warrants that his or her plans or specifications “have been prepared with the ordinary skills, care and diligence commensurate with that rendered by members of his or her profession” because the contractor must reply on the design documents during both the bidding and the construction phases. Accordingly, a contractor may bring a claim against the design professional for breach of this implied warranty.
In affirming the lower court’s grant of summary on Eastern’s claim that it was a third-party beneficiary to the contract between Kanakanui and Salem, the Court relied on a West Virginia statute (W. Va. Code § 55-8-12) requiring that, in order to support such an action, the contract need be made for the “sole benefit” of the claimant. In making the determination as to whether the contract was made for the “sole benefit” of the claimant, in the absence of an express contractual provision, the presumption is against allowing a third-party beneficiary action. Eastern offered no evidence efficient to overcome this presumption.
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New York Court Holds That Parent of Dissolved Subcontractor May Not Sue Prime Contractor or Surety Absent Formal Merger or Prime Contractor's Assent to Substitution
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A. Servidone, Inc. v. Bridge Technologies, LLC,
2001 N.Y. App. Div. LEXIS 1407 (N.Y. App. Div. Feb. 8, 2001)
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| Servidone contracted with the State Department of Transportation to build three bridges. Pursuant to that contract, Servidone subcontracted with Bridge Technologies, Inc., for installation of the superstructures of two of the bridges. During the performance of the subcontract work, Bridge Technologies, Inc. was dissolved, and its parent corporation, Bridge Technologies Ltd. continued the performance of the subcontract. Servidone, however, was not notified of the dissolution.
A dispute arose concerning the performance of the subcontract, and Servidone withheld final payment. In two separate actions, the parent corporation sought to bring claims for breach of contract and quantum meruit against Servidone and upon a statutory payment bond issued by Reliance Insurance Company, as surety to Servidone.
The Supreme Court, Appellate Division upheld the dismissal of all three claims. It held that Bridge Technologies, Inc., as a corporation, had a legally distinct and independent existence from its parent prior to its dissolution, and that the record afforded no basis for disregarding that corporate form. Since the parent failed to establish that it was a party to the written subcontract, its claim for breach of contract did not state a cause of action. Similarly, in the absence of the proof of a merger, the court rejected the contention that Bridge Technologies, Inc., by its dissolution, merged into the parent. Similarly, Bridge Technologies, Ltd.’s status as parent did not confer upon it the authority to enforce the subcontract. Moreover, the existence of a written contract between Servidone and Bridge Technologies, Inc., precluded an action in quantum meruit by the parent. Finally, because the parent did not furnish labor or materials pursuant to a subcontract made directly with Servidone, or even with Bridge Technologies, Inc., it had no right to sue under the statutory payment bond.
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Federal Circuit Court of Appeals Denies Contractor Recovery on Claim For “Differing Site Conditions” Because Information Available for Inspection but Not Incorporated in the Contract Documents Revealed Conditions Which Were Encountered
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Randa/Madison Joint Venture III v. Dahlberg,
239 F.3d 1264, 2000 U.S. App. LEXIS 1736 (U.S. Fed. Cir., Feb. 7, 2001)
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| Randa/Madison Joint Venture III (“Contractor”) entered into a construction contract with the United States Army Corp of Engineers (“Government”) to perform de-watering of an excavation for a pump house foundation that was to extend forty (40) feet below the existing ground surface. The contract included the standard differing site conditions clause set forth in Federal Acquisition Regulation (“FAR”) § 52.236-2 (2000). In addition, the contract included two separate clauses which addressed the Contractor’s obligations to inspect the site and materials produced by the Government that were made available for inspection. The first clause required that the Contractor acknowledge that it has satisfied itself as to the character, quality, and quantity of surface and subsurface material or obstacles to be encountered insofar as this information is reasonably ascertainable from any inspection of the site, including all exploratory work done by the Government. The second clause addressed physical data and stated that whenever subsurface exploration logs are presented in the Contract Documents, soil test results and soil and rock samples are available for inspection. These test results and samples were not included in the contract documents.
Prior to submitting its bid, the Contractor did not inspect the gradation curves, other test results, or the soil and rock samples that were made available for inspection by the Government.
Upon commencing work, the Contractor determined that it had underestimated the extent of the de-watering operation, incurred enormous difficulty in de-watering the pump house site, and incurred additional expenses over the amount that it had projected and bid. The Contractor filed a timely claim with the Government for an increase in the contract price, alleging that it encountered excessive groundwater constituting a different site condition. The Government failed to issue a final decision on the Contractor’s claim, resulting in a deemed denial of the claim. The Contractor appealed to the Armed Services Board of Contract Appeals (“ASBCA”). The ASBCA denied the Contractor’s claim stating that the Contractor has failed to prove that the conditions encountered at the site materially differed from those indicated in the contract or that the conditions at the site were of an unusual nature, which differ from those ordinarily encountered. The Contractor appealed.
On appeal, the Contractor did not focus its argument or whether the additional information referenced in the contract depicted the alleged differing site conditions. Instead, the Contractor argued that it had no duty to review this information, or alternatively, the Government had an affirmative duty to disclose the additional information beyond just making that information available for inspection.
In affirming the ASBCA, the Federal Circuit Court of Appeals held that reference in a contract that identifies that additional material and/or information is available for inspection, puts a contractor on notice of that information and the contractor is presumed to have reviewed it. Thus, the Contractor had a duty to review the soil test results and other information explicitly referenced in the contract and available for inspection. The Court also held that the Government’s reference in the contract to additional materials that were available for inspection was sufficient and the Government had no further duty of disclosure. Applying this reasoning, the Court concluded that the test results, samples and other information made available for inspection accurately depicted the conditions of the site and affirmed the ASBCA’s denial of the Contractor’s claim. |
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