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Surety Waives Defense to AIA A312 Payment Bond Claim by Failure to Object Within Bond’s 45- Day Limit
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Nat'l Union Fire Ins. Co. v. David A. Bramble, Inc.
388 Md. 195, 879 A.2d 101 (Md. July 21, 2005)
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| In connection with construction of a resort hotel project, general contractor Clark Construction provided a payment bond securing its obligation to pay its subcontractors for all labor, material, and equipment required. The bond was a standard American Institute of Architects document A312 form, used without alteration to the form language, issued jointly by three sureties. In the event claim was made against the bond, it provided that the surety would “Send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.”
Clark entered into subcontracts for the construction of a golf course and sewer piping systems to the resort. During the course of the project, Clark made periodic progress payments to the subcontractors as it was paid by the owner. After the completion of their work, however, both subcontractors attempted unsuccessfully to collect the final amount still owed by Clark, and submitted claims to the sureties against the payment bond.
The sureties responded, requesting supporting documentation, and after its submittal, stated that they would take the claim up with Clark. Despite requests from the subcontractors for an answer to their claims, they received no further communication from the sureties. Each of the subcontractors filed a complaint against the sureties alleging breach of contract and filed a motion for summary judgment based on the sureties’ failure to comply with the bond’s term requiring dispute of claims within 45 days. The motions were granted and the sureties appealed.
The Court of Special Appeals affirmed, holding that the language of the bond precluded the sureties from disputing the subcontractors’ claims because they had failed to comply with the provision of the payment bond requiring the sureties to dispute a subcontractor’s claim for payment within 45 days. The sureties filed a petition for a writ of certiorari in both cases, which were consolidated. The Surety Association of America and the American Insurance Association filed an Amici Curiae Brief in support of the sureties urging reversal.
The Court of Appeals affirmed the decisions in favor of the subcontractors. The court noted that surety agreements are construed according to ordinary canons of contract construction. Specifically, it recognized adherence to the rule that a contract containing no ambiguity will be enforced, and the principle of giving effect to all of a contract’s provisions when possible. Applying these rules, the court rejected the sureties’ argument that their failure to respond within 45 days indicated that the entirety of the claims was being disputed. The court found it would be inconsistent with the plain meaning of the bond’s language to allow sureties to dispute a claim in its entirely simply through inaction. Further, such an interpretation would render the 45-day requirement nugatory and be counter to the very purpose of a surety bond, which is to protect the parties supplying labor and materials to a project. The court concluded that under the plain language of the payment bond’s provision, the sureties were required to answer the claimant’s claim, define which portions were undisputed, and list the bases for any amounts that were disputed. Therefore, the sureties’ failure to do so within the 45-day period rendered the claims undisputed in their entirety, requiring prompt payment of the claims submitted by the subcontractors.
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Subcontract Term Takes Precedence Over Prompt Pay Provision of Pennsylvania Commonwealth Procurement Code Less Favorable to Subcontractor
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American Rock Mechanics, Inc. v. N. Abbonizio Contractors, Inc. and Fidelity and Deposit Company of
2005 PA Super 390; 2005 Pa. Super. LEXIS 4086 (Pa. Super. Ct. 2005)
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| In American Rock Mechanics, Inc. v. N. Abbonizio Contractors, Inc. and Fidelity and Deposit Company of Maryland, 2005 Pa. Super. 390, (Pa. Super. Ct. 2005), the Court held that the terms of the parties’ subcontract concerning time for payment took precedence over the those set forth in the Commonwealth Procurement Code, 62 Pa.C.S. § 3933.
Plaintiff, American Rock Mechanics, Inc. (“AMROC”) entered into a subcontract with Defendant, N. Abbonizio Contractors, Inc. (“Abbonizio”), for drilling and earth removal services on a sanitary sewer project (the “Subcontract”). The Subcontract required Abbonizio to make weekly payments during the life of the project and pay all remaining amounts within thirty days of the project’s completion. When Abbonizio failed to make the payments required under the Subcontract, AMROC commenced an action for payment in the Court of Common Pleas of Montgomery County.
For its defense, Abbonizio argued that the “pay-when-paid” terms of the Commonwealth’s Procurement, not the payment terms of the Subcontract, controlled Abbonizio’s payment obligations. Accordingly, Abbonizio contended that AMROC’s claims were barred by failure of the owner to remit payment to Abbonizio. Upon AMROC’s motion, the trial court granted judgment on the pleadings in favor of AMROC.
On appeal, among other issues, the Superior Court reviewed whether Abbonizio’s payment obligations to AMROC were controlled by the “pay-when-paid” terms of the Commonwealth Procurement Code, or whether the payment terms of the Subcontract controlled. The Superior Court held that the parties’ Subcontract controlled Abbonizio’s obligation to make payment.
Specifically, the Court determined that the legislature did not intend to defeat the terms negotiated between a contractor and subcontractor. Moreover, the legislature did not intend to condition subcontractors’ receipt of payment upon the contractor’s own receipt of payment from the responsible government agency. The legislature merely intended to insure that no contractor can wrongly withhold payment from a subcontractor for work completed in accordance with the parties’ contract.
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Missouri Court Holds Subcontractor Tortiously Interfered with Contractor’s Agreement with Owner by Seeking Payment Directly from Owner
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Environmental Energy Partners Inc. v. Siemens Building Technologies,Inc., et al.
Nos. 26521 & 26702, 2005 Mo. App. LEXIS 1568 (Mo. Ct. App., Oct. 25, 2005)
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| In Environmental Energy Partners Inc. v. Siemens Building Technologies, Inc., et al., Nos. 26521 & 26702, 2005 Mo. App. LEXIS 1568, a payment dispute arose between a contractor and its subcontractor on a hospital renovation project. When the contractor refused to pay the subcontractor the remaining subcontract balance ($201,178.75) on the basis that the subcontractor’s work was not completed, the subcontractor filed a mechanic’s lien against the property. The subcontractor then filed a petition to enforce its lien, naming the contractor and owner as defendants. Because of the subcontractor’s lien, the owner withheld the last installment payment of $148,475 due to the contractor under their agreement. Thereafter, and unbeknownst to the contractor, the subcontractor and the owner entered into a confidential “Settlement Agreement and Release” under which the owner agreed to pay directly to the subcontractor the $148,475 amount that it was withholding from the general contractor in exchange for a release of the lien upon entry of judgment in the litigation.
The contractor thereafter filed a four-count counterclaim against the subcontractor alleging, among other things, that the subcontractor tortiously interfered with its contract with the owner by entering into the Settlement Agreement and Release. At trial, the jury returned a verdict in favor of the contractor, awarding $26,100 in actual damages and $500,000 in punitive damages.
On appeal to the Missouri Court of Appeals, the subcontractor argued that the contactor’s claim should not have been submitted to the jury since it was justified, as a matter of law, in its conduct in securing the final payment from the owner. Citing Missouri law on the justification element of a tortious interference claim, it argued that it was privileged to interfere with the relationship of the contractor and owner because it was protecting its own valid economic interests.
The Missouri Court of Appeals disagreed. It concluded that, under Missouri law, the type of valid economic interest justifying interference with another’s contract requires a “definite legal right to take without any qualification.” The court further observed that “[c]ontractual provisions can determine the presence, or lack of presence, of justification with respect to a claim of tortious interference.” Applying these principles, the court found that the requisite unqualified legal right to interfere was lacking, particularly since the provisions in the respective parties’ agreements provided otherwise. Under the provisions of a subcontract, for example, the subcontractor was required to submit written requests and certifications of completion of its work as a prerequisite to payment. The subcontractor was further required to cooperate with the contractor in its dealings with the owner on payment issues. Significantly, the subcontract also contained a “pay-when-paid” clause: “No payment due subcontractor unless contractor receives payment.”
Based on these provisions, and the evidence at trial showing that the subcontractor completely failed to comply with these provisions, the court upheld the jury’s finding of tortious interference. It concluded: “By reason of the provisions of its contract with [the contractor], [the subcontractor] lacked the legal right to cause [the owner] to divert the payment that was to be paid to the [general contractor] to [the subcontractor].” It affirmed the jury’s verdict, including the $500,000 award of punitive damages.
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Maryland Court Holds that Subcontract Requirement of Passing Through Subcontractor’s Claims Against Owner Does Not Create “Pay-When-Paid” Condition; Prime Contractor Remains Liable for Payment
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Richard F. Kline, Inc. v. Shook Excavating & Hauling, Inc.
165 Md. App. 262, 885 A.2d 381, 2005 Md. App. LEXIS 273 (Maryland Ct Spec. App., October 31, 2005)
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| Richard F. Kline, Inc. (“Kline”) contracted with the City of Frederick, Maryland (the “City”) for the construction of a flood control project. Kline subcontracted with Shook Excavating & Hauling, Inc. (“Shook”) to perform a portion of the excavation work. The subcontract did not contemplate Shook’s removal of any contaminated soils. When such soils were discovered, the City and project engineer directed Kline to begin remediation. Kline in turn requested that Shook perform this work, and Shook did so. Eventually, the Maryland Department of the Environment determined that the soils were not in fact contaminated. Disagreeing with this determination, however, Kline and Shook continued to remediate the soil before using it as backfill.
The City rejected Kline’s request for compensation for Shook’s remediation work. Kline then unsuccessfully sued the City attempting to recover this payment. Finally, Shook in its own right sued Kline seeking payment for its work. Kline claimed the subcontract precluded the suit because of the City’s denial of Kline’s claim. The subcontract required that Kline would prosecute any claim Shook may have had against the City, that Shook would be bound by the City’s decision, and that “[Shook] hereby waives any rights it otherwise might have against [Kline], and agrees never to look to [Kline] for payment on account of such claim ….”
Kline contended that provision made any payment from Kline to Shook conditional upon payment from the City to Kline, i.e., a “pay-when-paid” clause. The Maryland Court of Special Appeals affirmed the trial court’s rejection of this argument. The court noted that the existence of an express condition depends upon the intent of the parties as evidenced by the language of the contract. The court stated that, although no specific language is necessary to create an express condition, words such as “if,” “provided that,” “when,” “after,” “as soon as,” or “subject to” are typically used, but were not present in the contested subcontract provision. The court also contrasted a prior case upholding a “pay-when-paid” provision which explicitly made payment from the owner a “condition precedent” to contractor’s payment to its subcontractor. Finally, the court noted that contract language is construed against finding a condition where doing so would result in forfeiture by one party.
Additionally, the court rejected Kline’s argument regarding the Subcontract requirement that Shook perform its work under the direction of the City or the project engineer. Consequently, Kline maintained, Kline could not be liable for Shook’s violation of this clause by proceeding with remediation at Kline’s own direction. The court instead found that the parties had orally modified that provision. Both parties agreed that Kline supervised Shook and that Shook took all of its orders from Kline throughout the project. Under Maryland law, such conduct could modify the terms of the agreement even though the contract specified that all modifications must be in writing. As such, the court found Kline liable for payment based on its request that Shook perform the work.
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Massachusetts Court Equates Change in Construction Sequence with a Change in Scope, Awarding Inefficiency Damages Based on Modified Total Cost Claim
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Daniel Marr & Son Co. v. Coreslab Structures, Inc. et al.
No. 03-1880, 2005 Mass. Super. LEXIS 545, (Mass. Supp. Nov. 21, 2005)
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| In Daniel Marr & Son Co. v. Coreslab Structures, Inc. et al., No. 03-1880, 2005 Mass. Super. LEXIS 545, (Mass. Supp. Nov. 21, 2005), plaintiff sub-subcontractor sued defendant subcontractor for various breaches of contract related to the construction and erection of precast concrete panels. The original scope of work dictated the erection of the precast panels would proceed on a floor-by-floor basis. During the project, the defendant order plaintiff to alter the erection sequence, requiring plaintiff to install the precast panels on an as-directed basis. Plaintiff subsequently asserted a claim for productivity inefficiencies related to the revised sequence and other issues. Defendant attacked Plaintiff’s damages calculations as an “unsegregated partial total cost claim.”
The court first determined that the Scope of Work specifically dictated the floor-by-floor approach, and that any change to that sequencing constituted a change in scope. Regarding Plaintiff’s damages calculation, the court agreed that certain aspects of the damages were unproven. However, Plaintiff’s inefficiency claim for the change in sequence was proven “to a reasonable degree of certainty,” bolstered by expert testimony. Plaintiff’s expert testified specifically on the precast panel erection data, opining on the reasonableness of the bid and the actual hours expended. Furthermore, Plaintiff was not required to determine its losses on a more detailed or segregated basis. Accordingly, the court awarded Plaintiff inefficiency damages for the change in scope.
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Flow Down Provision Requires Subcontractor to Proceed During Pendency of Dispute Over Extra Work – A Dispute The Subcontractor Loses as a Result of Course of Performance
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LBL Skysystems (USA), Inc. v. APG-America, Inc.
No. 02-5379, 2005 U.S. Dist. LEXIS 19065 (E.D.Pa. Aug. 31, 2005)
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| In LBL Skysystems (USA), Inc. v. APG-America, Inc., No. 02-5379, 2005 U.S. Dist. LEXIS 19065 (E.D.Pa. Aug. 31, 2005), the District Court concluded that a subcontractor was contractually obligated to continue performance, despite its dispute with the contractor over alleged extra work. Further, the Court concluded that the subcontractor was in the wrong, as its course of performance demonstrated that certain steel work was, in fact, within the subcontractor’s original work scope. As a result, the Court concluded that the contractor’s decision to terminate the subcontract was proper.
The parties’ dispute arose out of US Airways’s project to construct and renovate certain terminals at the Philadelphia International Airport (the “Project”). LBL Skysystems (USA), Inc. contracted with US Airways to supply and install the curtain wall, insulated metal panels, skylights and louvers for the Project (the “Prime Contract”). LBL, in turn, subcontracted the supply and installation of the insulated metal wall panels to APG-America, Inc. (the “Subcontract”).
To install the insulated metal wall panel system, the panels are attached to support steel, which is attached to the structural steel of the building. The Subcontract, via an attached Proposal Form, delineated the extent of APG’s responsibility for the supply and installation of the steel needed to perform its work scope. Pursuant to this form, APG was required to design, engineer, fabricate, furnish and install all steel relevant to its work, which was not “sized or indicated” on the structural steel drawings.
Relying on certain notations on the drawings, APG claimed that the support steel for the panels was “sized and indicated” on the drawings, and therefore was outside of its work scope. LBL disagreed, and demanded that APG provide the necessary steel. APG subsequently demanded additional compensation. At this time, APG had a number of change order requests pending with LBL. Based on these pending change orders and the scope dispute, APG stopped work on the Project. LBL responded by terminating the Subcontract and eventually filing a lawsuit against APG and its surety for breach of contract.
The District Court, addressed, among others, the following key issues: (1) whether APG was responsible for the support steel for the metal panels and (2) whether APG was obligated to continue performance during the pendancy of a dispute. After a trial, the District Court found in favor of LBL on both issues.
In evaluating APG’s work scope, the Court recognized that if a contract is ambiguous, a court may consider extrinsic evidence in interpreting the terms of the contract. Finding the phrase “sized or indicated” ambiguous, the District Court turned to the conduct of the parties to determined whether or not APG was responsible for the support steel. According to the Court, such conduct was perhaps the strongest indication of what the contract meant.
APG’s shop drawings provided the first indication that APG understood it was responsible for providing the support steel. The shop drawings detailed the support steel for the panels, and APG never objected to the inclusion of this detail by its subconsultant. The activities on APG’s schedule also included the installation of support steel, and did not indicate that this steel was the responsibility of others. Finally, APG took responsibility for engineering support steel at certain areas of the Project. In light of this evidence, the Court found that the support steel was within the original scope of APG’s Subcontract.
After determining the scope of APG’s work, the Court turned its attention to whether APG had an obligation to proceed during the pendancy of a dispute. This analysis focused on Paragraph 2.1 of the Subcontract, the flow-down clause.
Paragraph 2.1 bound APG to LBL to the same extent LBL was bound to US Airways under the Prime Contract, except to the extent the Subcontract conflicted with the Prime Contract. In this case, the Prime Contract required LBL to continue performance during the pendancy of any dispute with US Airways. The Court therefore concluded that APG was obligated to proceed during the pendancy of any dispute with LBL. To support its holding, the Court noted that no provision of the Subcontract conflicted with the relevant paragraph of the Prime Contract. And, during contract negotiations, APG agreed to delete from the Subcontract a provision which entitled it to stop work in the event of nonpayment.
The Court’s holding drives home the need for clarity in the drafting of scope and flow down provisions in subcontract agreements.
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