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Septmeber/October 2004 Newsletters
Katz & Stone, L.L.P. Construction Newsletter
Septmeber/October 2004
USE OF SUBCONTRACTOR’S
BID IS INSUFFICIENT TO CREATE A CONTRACT
In Electro-Lab of Aiken, Inc. v.
Sharp Construction Co. of Sumter, Inc.,
357 S.C. 363 (2004), an electrical subcontractor orally submitted
a bid to a general contractor that was accepted in the general
contractor’s winning bid for the construction
of a school. The general contractor notified the subcontractor
that it had the lowest bid for the electrical work and asked
the subcontractor to put its bid in writing, prepare shop drawings
and have performance and payment bonds issued. The subcontractor
informed the general contractor that it would not be able to
obtain bonds for the project and the general contractor then
notified the subcontractor that because of its inability to
obtain the requisite bonds it would not get the contract.
The subcontractor brought suit nine months
later alleging the general contractor breached the parties’ contract by hiring
another subcontractor for the electrical work. The trial court
ruled in favor of the general contractor determining that no
contract existed between the parties. The South Carolina Court
of Appeals affirmed the trial court’s decision, noting
the general rule of law that a general contractor’s use
of a subcontractor’s bid does not constitute acceptance
of an offer. This is because a contract only exists when there
is an actual agreement between the parties, in which the parties
demonstrate a mutual intent to be bound. The general contractor’s
use of the subcontractor’s bid fell short of manifesting
any assent to the terms of the bid or the required mutual intent
to be bound.
The subcontractor unsuccessfully argued
that based on the totality of the circumstances, the subcontractor’s and general contractor’s
actions served to form an enforceable contract. The court disagreed,
because following the receipt of the subcontractor’s bid,
the general contractor’s project manager informed the subcontractor
that it was the low bidder and asked the subcontractor to send
its bid and bond rates in writing. The court held that this communication
fell short of a mutual assent to be bound and could be better
described as preliminary negotiations. Further, the subcontractor,
in attending the preconstruction meeting and gathering submittals,
did not establish mutual intent to be bound or any acceptance
by the contractor.
Subcontractors should be aware of the risks
when they submit bids to contractors. In some states, a contractor’s use
of a subcontractor’s bid in its bid, may result in an enforceable
subcontract under the theory of promissory estoppel. However,
as this case demonstrates a general contractor’s mere use
of a subcontractor’s bid in its successful bid does not
necessarily constitute acceptance of that offer and a mutual
assent to be bound. Thus, without additional factors, the general
contractor’s use of a subcontractor’s bid may not
be enough to form an enforceable subcontract.
EIGHTH CIRCUIT HOLDS THAT MILLER
ACT ALLOWS SUBCONTRACTOR TO RECOVER DAMAGES CALCULATED UNDER
THE ‘TOTAL COST’ APPROACH REGARDLESS OF THE FAULT
OF THE GENERAL CONTRACTOR
In Lighting & Power Services, Inc. v. Wayne
M. Roberts d/b/a Robinson Quality Constructors, Inc., 345 F.3d
817 (2004), the U.S. Court of Appeals for the Eighth Circuit
held that under the Miller Act the ‘total cost’ method
of determining damages is an appropriate method for a subcontractor
to use to calculate delay damages even if the general contractor
defendant is not responsible for the delays at issue.
The dispute in Lighting & Power arose out of a U.S. Army
barracks renovation project (“Project”) in St. Louis,
Missouri. The general contractor for the project, Wayne M. Roberts,
Inc. (“general contractor”), retained Lighting & Power
Services (“subcontractor”) to be its electrical subcontractor.
In accordance with federal law and the construction contract,
the general contractor obtained a Miller Act bond.
Though the renovation was scheduled to
take only six months, the Project ultimately took 22 months
to complete because of numerous delays that both parties conceded
were the government’s
fault. After the work was complete, the subcontractor filed suit
under the Miller Act, seeking $110,641.00 in additional delay
costs.
The subcontractor used a method called
the ‘total cost’ approach
to calculate its damages. Under the total cost approach, the
damages sought are the actual cost of construction less any monies
already paid on the contract. At trial, the district court instructed
the jury that in order to recover damages under a total cost
theory, the subcontractor needed to establish by a preponderance
of the evidence that:
1. It was impracticable for the plaintiff to prove its actual
losses directly;
2. The plaintiff's bid was reasonable;
3. The plaintiff's actual costs were reasonable;
4. The defendant had some responsibility
in causing plaintiff's actual losses; and
5. The plaintiff incurred damages as a consequence.
The jury returned a verdict in favor of
the general contractor and the court entered judgment accordingly.
On appeal, the subcontractor argued that subpart four of the
jury instruction (bolded above) was erroneous because the Miller
Act permits claimants to recover “the
amounts due” under their contracts for labor and materials
costs, regardless of whether the general contractor was responsible
for causing those ‘extra’ or ‘additional’ costs.
Looking to its own decisions and those in several other circuits,
the Eighth Circuit Court of Appeals held that the Miller Act
entitles a subcontractor to recover all amounts it is due for
work performed, even when the defendant general contractor is
not at fault for the delays. The court reasoned that the Miller
Act favors this result because general contractors have privity
of contract with the government and can thus recover delay damages
directly from the government, while subcontractors cannot.
The Eighth Circuit also held that the total cost method can
be used to calculate damages under the Miller Act, even if the
claimant cannot prove that the general contractor was responsible
for the subcontractor's losses. A claimant must meet a four-part
test before it can use the total cost approach, namely, it must
prove that: (1) the nature of the particular losses make it impossible
or highly impracticable to determine them with a reasonable degree
of accuracy; (2) its bid was realistic; (3) its actual costs
were reasonable; and (4) it was not responsible for the added
expenses.
Because the trial court’s jury instruction erroneously
required the jury to find that the general
contractor “had
some responsibility in causing [the subcontractor’s] losses," rather
than simply find that the subcontractor was not responsible for
the added expense, the jury instruction was erroneous, so the
Eighth Circuit reversed the trial court and remanded the case
for further proceedings.
Where recovery under the total cost approach
is normally difficult because of the four part test, the Eighth
Circuit’s decision
in Lighting & Power makes the total cost approach more accessible
for Miller Act claimants and thus a potential tool for claimants
to use because it removes the necessity of proving or even arguing
that the general contractor was the culprit for the delay.
MILLER ACT SUIT UNTIMELY
DESPITE ONGOING COMMUNICATIONS WITH THE SURETY
Contractors seeking to collect unpaid monies
under a federal Miller Act bond are required by statute to file
suit on the bond within one year after they last furnish labor
or materials to the construction project. As demonstrated in
United States f/b/o East Coast Contracting,
Inc. v. United States Fidelity and Guaranty Co., 2004 U.S. Dist. lexis 14441 (D. Md.
July 23, 2004), failure to strictly comply with this statute
of limitations will generally result in waiver of the bond claim.
In East Coast Contracting, the concrete
subcontractor completed its work on a military base in June
or July, 2002, but had not been paid in full when the general
contractor filed for bankruptcy. In September, the subcontractor
filed a claim against the payment bond with the general contractor’s surety, and the surety
indicated that it would investigate. In October, the subcontractor’s
attorney inquired as to the status of the claim. The surety finally
responded in January, 2003, that it had been undertaking a time-consuming
investigation and requested the subcontractor’s “continued
patience” with the surety’s evaluation of the subcontractor’s
and other bond claims. Each letter from the surety included a
disclaimer noting the surety’s “express reservation
of all rights and defenses that may be available to the surety
or its principal,” including all “defenses available
pursuant to any notice and suit limitation provisions.”
On March 20, 2003, the subcontractor’s representatives
visited the work site, at the request of the new general contractor,
to inspect damaged concrete. Thereafter, the subcontractor informed
the new general contractor that the damage appeared to have occurred
after completion of the subcontractor’s work, and the subcontractor
would only perform repairs if the parties entered into a separate
agreement. No such agreement was ever reached and the subcontractor
did not perform the repair work. In April, the surety requested
additional information, which the subcontractor provided in May.
Finally, in August, the surety denied the subcontractor’s
claim as time-barred, on the grounds that the subcontractor performed
its last work on the project more than a year earlier without
having ever filed suit under the payment bond. Three months later,
the subcontractor filed suit against the surety.
The court determined that, because the
subcontractor had completed all other work in June or July,
2002, more than a year before bringing suit in November, 2003,
its claim would only be timely if its inspection of the damaged
concrete in March, 2003 qualified as its last performance of
work on the project. Concluding that the March activity did
not qualify as the subcontractor’s
last work, the court held that the applicable standard was whether
the work was performed as part of the original contract, rather
than simply to correct defects or make repairs. In support, the
court cited caselaw holding that the statute of limitations starts
to run on the removal of supplies, material and equipment from
the jobsite after the completion of contract work, which the
subcontractor would have done in June or July, 2002, and that
tests of remedial or corrective work or the performance of warranty
work do not qualify as last work for purposes of the Miller Act’s
one-year limitation. The court concluded that the subcontractor’s
March site inspection was not a part of the original contract,
and did not involve any new construction, much less repair or
correction of damage. Moreover, as the subcontractor sought a
new agreement to perform any work, it clearly did not regard
the March inspection as integral to its original contract. As
a result, the court held that the subcontractor performed its
last work on the project in June or July, 2002, more than a year
prior to filing suit.
The court rejected the subcontractor’s contention that
the surety’s requests for documentation and assurances
that it was investigating the claim had caused the subcontractor
to delay filing suit. The court found that the surety never promised
to pay the subcontractor’s claim, but merely requested
the subcontractor’s patience with its investigation, and
always expressly reserved its Miller Act defenses. The subcontractor
itself never promised to forbear filing suit, but rather repeatedly
hinted at the possibility of litigation. In addition, the subcontractor
was represented by counsel, and waited nearly three months after
the surety finally denied its claim before finally filing suit.
As such, the court held that the subcontractor’s untimeliness
in filing suit was not caused by the surety, and awarded judgment
to the surety on the subcontractor’s Miller Act claim.
Contractors contemplating a Miller Act claim must comply with
the one-year deadline for filing suit on the bond, or risk losing
their claim as in East Coast Contracting. In so doing, contractors
must be keenly aware that the limitations period runs from their
last performance of work as part of their original contract,
not subsequent repair or warranty work. Moreover, potential claimants
must not let themselves be lulled into missing the filing deadline.
SUBSTANTIAL PERFORMANCE ALLOWS
CONTRACTOR TO RECOVER FOR THE COSTS OF REBUILDING A STRUCTURALLY
SOUND WALL
In Edgewater Construction
Co. Inc. v. 81 & 3
Of Watertown, Inc., 769 N.Y.S.2d 343 (2003), a subcontractor
was 75 percent complete with the construction of a foundation
wall for a Sams Club store when it was discovered that the subcontractor
had failed to install a horizontal wall reinforcement, know as “Dur-O-Wall,” as
required by the specifications. The contract specified installing
the reinforcement on every course of below-grade masonry block.
The standard industry practice, however, was to install Dur-O-Wall
on every other course of below-grade masonry block. The difference
in material due to the omission was only $619.20 on costs incurred
to that point of approximately $300,000.00. The owner, however,
required the contractor to rebuild the entire wall at a cost
in excess of $500,000.00. After rebuilding the entire wall, the
contractor filed suit to recover the cost from the owner.
The trial court held that the failure by
the subcontractor to install the reinforcement on every course
of the wall instead of every other course of the wall was unintentional,
trivial and did not make the wall any weaker, thus requiring
the contractor to rebuild the wall was a breach of contract
on the part of the owner. The New York Supreme Court of Appeals
upheld the trial court’s decision, holding that the record established that
the failure to install the additional reinforcement was the result
of the subcontractor’s oversight and inattention and not
because of any fraudulent or willful conduct by the contractor
or subcontractor.
The New York Supreme Court of Appeals reasoned
that the omission was minimal and that the masonry inspector
hired by the owner had even failed to notice that the additional
reinforcement was missing. The unusual nature of the specification,
which was meaningless in terms of the foundation’s integrity,
was the basis for the inadvertent failure by the subcontractor
and contractor to notice the omission of the extra reinforcement.
The Court of Appeals held that the trial court properly applied
the doctrine of substantial performance when it awarded the
subcontractor breach of contract damages for the costs of rebuilding
the entire foundation.
Owners, contractors and subcontractors should be aware that
in certain circumstances contractors may not be forced to comply
with every single requirement of the contract so long as their
omissions do not detract from the overall integrity of their
work.
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