|
Subcontracts often incorporate the general contract between the
general contractor and owner, thereby binding the subcontractor
to the terms of the general contract. However, as Casey
Indus., Inc. v. Seaboard Surety Co., 2006 U.S. Dist. LEXIS
51380 (E.D.Va. 2006) demonstrates, where the parties intentionally
delete such incorporation provisions, the subcontractor
will not be bound by the terms of the general contract.
In Casey, the contractor and owner entered into a general contract
in 2002 to construct a power generation facility. The general
contract provided that if substantial completion did not
occur by the as-scheduled substantial completion date, the contractor
would be responsible for liquidated damages. The
surety issued performance and payment bonds for the contractor
in connection with the construction of the generation facility.
Pursuant to an indemnity agreement, the contractor assigned
its rights in the general contract to the surety in the
event the contractor was declared in default.
In May of 2003 the contractor and a subcontractor entered into
two subcontracts for utility work for the generation facility.
Although the subcontracts incorporated the general contract,
the parties deleted the incorporation provision in the subcontracts.
In May of 2004 the subcontractor demobilized from the project;
the subcontractor asserted that all work under the subcontracts
had been completed. Subsequently, the owner declared the contractor
in default and terminated the general contract. The owner demanded
that the surety complete construction of the generation facility
pursuant to the terms of the performance bond.
Claiming that it was entitled to all the rights and defenses of
the contractor (including the contractor’s rights with respect to the sub-
|
contracts), the surety sued the subcontractor because
the owner filed suit against the surety for liquidated damages
for delay. Specifically, the surety alleged that project was not
substantially completed by the as-scheduled date due to the
subcontractor’s delay. The surety claimed that pursuant to the
incorporation provision of the general contract, the subcontractor
was then liable to the surety to the same extent that the
surety was liable to the owner for liquidated damages.
The subcontractor moved to dismiss the surety’s claim for
liquidated damages. The subcontractor argued that the subcontracts
expressly excluded the terms of the general contract.
Therefore the surety could not assert a claim against the subcontractor
for liquidated damages arising out of the general
contract.
The court agreed with the subcontractor; the surety was precluded
from seeking liquidated damages from the subcontractor.
The court found that the contractor and subcontractor intentionally
deleted the provisions of the subcontracts that
incorporated the terms of the general contract. Notwithstanding,
the surety was not precluded from seeking actual
damages.
As Casey demonstrates, courts will not hold subcontractors
to the terms of a general contract unless the subcontract explicitly
states that the subcontract incorporates the terms of
the general contract. Therefore, contractors, subcontractors,
and even sureties, should all take note as to whether a subcontract
incorporates the general contract’s terms, thereby
binding the subcontractor to the terms of the general contract.
|
