September/October 2006 Newsletters

 

Katz & Stone, L.L.P. Construction Newsletter
September/October 2006

KENTUCKY COURT FINDS THAT SUBCONTRACTOR
NOT BOUND BY BID INCORPORATED INTO CONTRACTOR’S BID

Subcontractors’ bids are routinely included in contractors’ bids prior to the contractor accepting the subcontractors’ bids.  However, if a contractor does not accept a subcontractor’s bid in a timely manner after the contractor’s bid is accepted, the subcontractor may not be bound by its bid.  This principle is discussed in Rotondo Weirich Enterprises, Inc. v. Rock City Mechanical, Inc., 2006 U.S. Dist. LEXIS 19177 (E.D. Ky. 2006).

In Rotondo, the general contractor on a prison construction project solicited a bid from a concrete subcontractor for the construction and installation of pre-cast concrete cells (the “Cells”).  The general contractor also solicited a bid from an HVAC contractor to perform HVAC and plumbing work on the outside of the Cells. 

At the request of the general contractor, the HVAC subcontractor submitted a proposal directly to the concrete subcontractor to perform certain HVAC and plumbing work on the inside of the Cells (the “Inside Work”).  Incorporating the HVAC subcontractor’s bid for the Inside Work into its own bid, the concrete subcontractor submitted its bid for the installation and construction of the Cells to the general contractor.  Based upon this bid, the general contractor awarded the concrete subcontractor the subcontract for the construction and installation of the Cells, which included the Inside Work.

A year later, the concrete subcontractor sent the HVAC subcontractor a proposed subcontract to perform the Inside Work. However, the HVAC subcontractor never performed the Inside Work.  Thus, the concrete subcontractor was forced to reprocure the HVAC work from a third-party.  The concrete subcontractor filed suit against the HVAC subcontractor seeking damages under the theories of breach of contract and promissory estoppel.

Addressing the concrete subcontractor’s claim for breach of contract, the court found that no contract existed which would require the HVAC subcontractor to perform the Inside Work because the concrete subcontractor never accepted the HVAC subcontractor’s bid.  As such, the court held that the HVAC subcontractor did not breach any contract with the concrete subcontractor regarding the performance of the Inside Work. 

Addressing the concrete subcontractor’s claim based upon promissory estoppel, the court found that for promissory estoppel to apply, the concrete subcontractor must demonstrate that it had unequivocally accepted the HVAC subcontractor’s bid shortly after the general contractor awarded the subcontract for the Cells to the concrete subcontractor.  The court then noted:  “Promissory estoppel acts to prevent a subcontractor from withdrawing its bid before the general contractor has a chance to accept.  It does not act to hold a subcontractor indefinitely bound while the general contractor tarries for no apparent reason.”  Therefore, the HVAC subcontractor was not bound by its bid because there was never any acceptance, let alone a timely acceptance, by the concrete subcontractor of the HVAC subcontractor’s bid for the Inside Work.

As Rotondo reveals, a subcontractor is not automatically bound by a bid which is incorporated into a contractor’s bid. Therefore, contractors that rely upon and include bids from subcontractors in their own bids must note that a subcontractor may not be bound by its bid if the contractor does not accept the subcontractor’s bid in a timely fashion.

 

 

MICHIGAN COURT FINDS THAT CONTRACTOR WHO CROSSED
OUT THE WORD “FINAL PAYMENT” ON A SETTLEMENT CHECK
BEFORE DEPOSITING IT NONETHELESS ACCEPTED PAYMENT
AS FULL SETTLEMENT OF ITS CLAIM AGAINST HOMEOWNERS

Settlements of disputes are commonplace in the construction industry.  As demonstrated in Hoerstman General Contracting, Inc. v. Hahn, 474 Mich. 66 (Mich. 2006), the binding effect of a settlement often depends not only on how it is offered, but also how it is accepted.

In Hoerstman, homeowners hired a contractor to remodel their residence.  When significant delays and cost overruns occurred, combined with contractor’s failure to meet the scheduled completion date, the homeowners directed the contractor to finish the work regardless of the expense.  The contractor agreed so long as the homeowners paid the extra costs; the homeowners concurred.  Upon completion, the homeowners acknowledged that they owed more than the original bid price and paid the contractor $125,000; however, the contractor claimed that it was owed an additional $32,750.  In an attempt to settle the dispute, the contractor offered to accept $16,910.79 in lieu of the claimed amount.  In a letter to the contractor, the homeowners replied that only a $5,144.79 balance was due.  Included with their letter was a check for same amount.  The homeowners also wrote the words “final payment” on the check and indicated in their letter that they believed that such payment closed their account.  On advice of counsel, the contractor crossed out the words “final payment” and deposited the check.  When the homeowners made no additional payments, the contractor brought suit.  In their answer to the complaint, the homeowners asserted the affirmative defense of “accord and satisfaction” based on the depositing of the check representing final payment. The trial court held for the contractor without explicitly ruling on the issue of accord and satisfaction.  On appeal, the appellate court ruled that the words “final payment” were not sufficient to inform the contractor that acceptance of the check discharged the entire claim.

On further appeal, the state supreme court analyzed this accord and satisfaction issue.  First, the court noted that two lines of cases had developed regarding this legal principle.  The first line of cases held that the question of whether there was a “meeting of the minds” sufficient for an accord and satisfaction is a question for the jury.  The second line held that the required meeting of the minds is implied as a matter of law simply by the acceptance of an offer, and the fact that the recipient altered or crossed out text setting forth the offer is irrelevant.  In addition, the supreme court found that the state legislature subsequently adopted the uniform commercial code (“UCC”), which followed the second line of cases.  The court concluded that the UCC is intended to apply to nearly every situation involving negotiable instruments, like checks, including accord and satisfaction scenarios. Therefore, the court held that the UCC, not the common law, applies to an accord and satisfaction involving a negotiable instrument such as a check.

Under the UCC, the first requirement of an accord and satisfaction is a good-faith offer to a claimant to fully satisfy its claim.  The state supreme court found that the homeowners made what they thought was a fair offer and provided comprehensive explanation and support for the offered amount.  As such, the court concluded that the homeowners’ offer was made in good faith as required by the UCC.  The second requirement of an accord and satisfaction involving a negotiable instrument under the UCC is that the claim be “unliquidated” (i.e., liability for the claim and/or the amount of the claim is in dispute).  The supreme court determined that the contractor’s claim was unliquidated because the contractor performed extra work without an agreement regarding the amount to be paid, and the cost of the contractor’s changes and overruns were left unspecified and in dispute.  The fact that the homeowners acknowledged that some portion of the contractor’s claim was due did not make the claim liquidated.  Finally, for an accord and satisfaction, the UCC requires that the claimant obtain payment via a negotiable instrument.  The requirement was satisfied here because the contractor deposited the homeowners’ check.

Having found that the UCC’s requirements for an accord and satisfaction were satisfied by the homeowners’ check, the supreme court concluded that the contractor’s claim was discharged by its depositing of the check.  Under the UCC, there are two ways to discharge a claim by a negotiable instrument: (a) if the instrument, or an accompanying written communication, contains a conspicuous statement that it is being offered in full satisfaction of the claim, or (b) if the claimant knew that the instrument was offered to fully satisfy the claim.  The state supreme court found that the contractor knew that the homeowners intended the check as a final payment, but deposited it anyway due to incorrect legal advice that the depositing would have no effect under Michigan law.  Moreover, the court noted that both the check and the accompanying letter contained a conspicuous statement which demonstrated that the check was offered by the homeowners in full satisfaction of the claim.  Accordingly, the supreme court ruled that there was an accord and satisfaction and the contractor’s claim had been discharged by its depositing of the homeowners’ check.

Parties to a construction dispute must be very careful how they entertain settlement offers from the other party.  As Hoerstman shows, rejecting an offer to fully resolve your claim for a lower payment may be ineffective if you accept that lower payment. Further, the payee cannot unilaterally change a restrictive endorsement such as “final payment”.

 

 

CONTRACTORS MUST ENSURE THAT
SUBCONTRACTORS COMPLY WITH IMMIGRATION LAWS

Following the terrorist attacks of September 11, 2001 and the increasing concerns regarding illegal immigration, federal government agencies have begun to prosecute more vigorously employer violations of the laws against hiring illegal aliens.  The most well-known of these laws—the Immigration Reform and Control Act (“IRCA”), 8 U.S.C. § 1324(a) and 8 U.S.C. § 1324a—imposes fines and penalties upon employers who hire illegal aliens with the knowledge of their illegal alien status.  Additionally, IRCA specifically prevents an entity from hiring an independent contractor which employs illegal aliens.  Thus, a contractor must not only ensure that its employees are all documented aliens, but must also make certain that its subcontractors, and even its sub-subcontractors, do not themselves employ illegal aliens.

In many cases, prior to the more vigorous era of federal immigration law enforcement, a contractor could avoid scrutiny for using illegal alien labor if that labor was actually employed by a subcontractor, for the subcontractor was classified as independent contractor under IRCA.  Further, the federal government typically aggressively pursued only the party directly at fault for hiring the illegal alien.  Now contractors can no longer turn a blind eye to their subcontractors’ hiring policies. 

A recent case by the Department of Justice (“DOJ”) against Wal-Mart Stores, Inc. (“Wal-Mart”) demonstrates the federal government’s renewed emphasis on immigration law enforcement against employers of subcontractors who hire illegal immigrants.  Prior to the DOJ’s commencement of the Wal-Mart investigation in 2001, Wal-Mart utilized outside contractors to clean its stores.  These outside contractors employed illegal immigrants from Asia, South America, and Europe to perform these services. A nationwide investigation by the DOJ estimated that 345 illegal immigrants worked for the independent contractors which Wal-Mart hired to clean its stores.  Many of the illegal immigrants worked seven days a week without benefits or overtime pay.  In March of 2005, Wal-Mart and the DOJ reached a settlement in which Wal-Mart agreed to pay an $11 million fine; the independent contractors, who had actually employed the illegal immigrants only a paid a $4 million fine, collectively.  As the Wal-Mart decision demonstrates, federal government agencies will investigate and prosecute those entities which hire independent contractors which employ illegal aliens, and may even apply more severe sanctions against those who hire independent contractors than against such contractors themselves.     

Notwithstanding, contractors can take certain steps to prevent sanctions by the federal government.  Although each case is dependent upon the specific facts and circumstances, many contractors have begun to include provisions in their subcontracts which specifically (a) preclude the subcontractor from employing illegal aliens, (b) require compliance with the regulations of the Social Security Administration and the Department of Homeland Security and (c) require the retention of appropriate documentation and verification of all employees’ legal status.  The subcontract may also include a provision which forbids each subcontractor from employing any sub-subcontractor which knowingly employs illegal immigrants.  In fact, some subcontracts even require subcontractors to verify the legal status for all employees, either at the time of contract formation or when called upon to do so by the contractor. 

Even if an investigation determines that a subcontractor has employed illegal aliens, the contractor may still assert a “good-faith defense” regardless of whether the aforementioned provisions are contained in the subcontract.  Under the good-faith defense, a contractor may avoid penalties if the documentation of an alien’s legal status provided to the contractor by the subcontractor does not appear on its face to be fraudulent.  Essentially, as long as a subcontractor provides documentation to the contractor which appears genuine, the contractor is not required to (and in fact risks a discrimination claim if it does) delve further into the status of an alien employee.  Thus, a contractor that actively reviews the employment verification of its subcontractor’s employees can claim this good-faith defense.  Although such an action would certainly require more work than merely inserting the aforementioned subcontract provisions, it can provide additional protection from IRCA. 

Ultimately, a contractor who takes no action and includes no such provisions in its subcontracts is increasing its chances of violating IRCA as a result of a subcontractor’s employment of illegal aliens, even if the contractor has no actual knowledge of the aliens’ illegal status.  Therefore, all contractors should consider inserting specific language in their contracts which preclude a subcontractor from employing illegal aliens or violating any other immigration laws.  A contractor who turns a blind eye to its subcontractors’ employment practices could find itself facing a federal government investigation and serious fines and penalties.

BUILDING PERMIT DOES NOT CREATE A DUTY
ON THE PART OF A GENERAL CONTRACTOR TO PROVIDE
A SAFE WORK SITE FOR ITS SUBCONTRACTOR’S EMPLOYEES

A general contractor does not assume a duty to provide a safe work site for its subcontractor’s employees where the general contractor obtains a building permit for a work site.  This point is illustrated in the case of Helms v. Carmel High School Vocational Building Trades Corp., 2006 Ind. App. LEXIS 553 (Ind. Ct. App. 2006).  

Here, a general contractor hired a subcontractor to perform work on a single family home.  The general contractor applied for and received a building permit for the project from the city.  The application for the building permit provided that the general contractor would comply with all applicable state laws. 

An employee of a subcontractor was injured when he fell approximately twenty feet while installing flashing on a PVC pipe on the project.  The employee filed suit against the general contractor alleging that the general contractor had a non-delegable duty to provide the employee with a safe work site.  The employee claimed that the general contractor agreed to comply with all applicable state laws, including the state’s occupational health and safety statute, when the general contractor applied for a building permit.  The employee alleged that the general contractor failed to comply with this statute because it did not provide certain safety mechanisms on the project site. 

The court observed that the general contractor did not specifically contract with its subcontractors to provide a safe work site.  The court also noted that the general contractor did not expressly agree to comply with the state’s applicable employment laws.  In addition, there was no evidence which indicated that the general contractor agreed to provide a safety supervisor or perform safety inspections.

The court noted there was nothing in the building permit itself which indicated that the general contractor intended to assume a duty of care towards its subcontractor’s employees.  Further, the court found that the employee could not utilize the exceptions to the general rule that a principal is not liable for the negligence of an independent contractor; the employee failed to allege that his injuries were the result of negligent hiring of the contractor.  As a result, the court ruled that the general contractor did not owe the employee a duty of care as a matter of law.               

As a result of this case, general contractors should be aware that obtaining a building permit for a work site does not create a non-delegable duty of care to a subcontractor’s employees.