March/April 2004 Newsletters

 

Katz & Stone, L.L.P. Construction Newsletter
March/April 2004

 

CONTRACTOR’S FAILURE TO PROTECT AGAINST
REASONABLY FORESEEABLE RISK DEFEATS ACCELERATION CLAIM


In Fraser Construction Company v. United States, 57 Fed. Cl. 56 (2003), the United States Court of Federal Claims considered a contractor’s acceleration claim based on high water flows encountered while performing a contract for flood control work on a river. The court found that because the contractor had not protected against a reasonably foreseeable risk, the contractor could not recover.

The case arose out of a contract between the Army Corps of Engineers and Fraser Construction Company (“contractor”) for flood control work at the South Fork Zumbro River in Rochester, Minnesota, referred to as Silver Lake. The owner issued a solicitation to dredge and dispose of an estimated 109,000 cubic yards of material from Silver Lake. Although the solicitation did not specify the method by which the site was to be excavated, it provided for the “drawing down” of Silver Lake from its normal water elevation to facilitate the dredging process.

The contractor submitted a proposal in which it proposed building a temporary dam to divert the river from its natural course, thereby allowing it to excavate the material from the “dry” side of the dam. The contractor said that it would use bulldozers and backhoes to excavate the river-bottom material, and would haul the material to the disposal site with trucks. However, shortly after it began to build the upstream section of the temporary dam, elevated river flows overran the semi-completed diversion system and flooded the work. For much of the two weeks following the “flood” the contractor attempted to repair the diversion system, a task made more difficult by continued high river flows and the fact that the material used to rebuild the dam was saturated. Not long after the contractor completed the repairs, however, the project was again inundated by above-average peak flows.

Seeking relief for the flooded site conditions and the attendant performance difficulties, the contractor sought permission to suspend operations until the waters had receded. This request was orally denied by the owner. In a follow-up letter after the owner’s denial, the contractor requested an equitable adjustment in both time and money for what it called the “extra work” resulting from the innundation of the diversion system.

Although three contract modifications were subsequently issued over the course of the contract's performance, granting plaintiff thirty-three additional days based on unusually severe weather, no agreement was reached on the contractor’s claims based on high water flows. After certain adjustments to both equipment and scheduling, the contractor timely completed the project, and submitted a substantial claim for additional expenses it claimed to have incurred by accelerating its work.

When the owner denied the contractor's request for increased compensation, the contractor sued. The court noted that one of the elements of a claim for acceleration was that there was an excusable delay and that, according to the contract, the contractor was not responsible for delays arising from unforeseeable causes beyond the contractor’s control. The court concluded that the contractor could not rely on high water flows to establish a basis for excusable delay because it should have anticipated the peak flows at the project site based on the available surface water data. While the contractor presented evidence that the daily river flows were, on average, greater in volume than normally experienced, it was clear that the reason for the flooding was unusually high peak flows and that those flows were within a range that the contractor should have anticipated. As a result, the contractor could not establish an entitlement to its acceleration costs.

The Fraser Construction decision illustrates the importance of defining and guarding against “reasonably foreseeable” risks when planning performance. Failure to do so may force the contractor to bear extra costs when such risks materialize.

 

MARYLAND COURT REJECTS SUPPLIER’S BOND CLAIM FOR FAILURE TO PROVIDE TIMELY AND SUFFICIENT NOTICE

Claimants on payment bonds are generally required to give notice of their claims within certain time periods. As CTI/DC, Inc. v. Selective Insurance Co. of America, 271 F. Supp. 2d 758 (D. Md. 2003) demonstrates, failure to give such notice may be fatal to those claims.

In CTI/DC, a general contractor entered into a contract with Prince George’s County to perform work on a construction project. Pursuant to the Maryland Little Miller Act, the general contractor and its surety furnished the county with a payment bond. The general contractor subcontracted a portion of the work to a subcontractor, who then contracted with a supplier to provide certain materials for the work. The supplier last supplied materials to the project on October 1, 2002, but was not thereafter paid by the subcontractor. On December 3, 2002, the supplier sent a letter to the general contractor merely stating the outstanding sum owed for its work on the project. On January 10, 2003, the supplier sent a second letter to the general contractor, via certified mail, this time stating the amount due, that it was owed that sum by the subcontractor for materials furnished to the subcontractor, and that the supplier planned to make a claim on the payment bond. When the supplier continued to remain unpaid, the supplier filed suit against the subcontractor and the general contractor’s surety alleging a breach of the Maryland Little Miller Act due to nonpayment. The surety moved to dismiss the supplier’s suit on the grounds that the supplier failed to comply with the Act’s notice requirements, namely, that the first letter to the general contractor was insufficient notice of a bond claim and the second letter was untimely notice.

The court ruled in favor of the surety and dismissed the suit. Considering the January 10, 2003 letter first, the court found that the letter was untimely notice under the Little Miller Act because it was given more than 90 days after the supplier completed its delivery of materials to the project. The court rejected the supplier’s argument that the120-day notice period required by Maryland’s mechanic’s lien statute should apply to the supplier’s notice, finding that the bond was clearly a Little Miller Act bond and the bond’s reference to a section of the mechanic’s lien statute had nothing to do with, and did not indicate the parties’ intent to apply, the lien statute’s notice provisions.

Turning to the December 3, 2002 letter, the court held that the letter was insufficient notice under the Little Miller Act because, while it did state the amount owed, the notice was not sent via certified mail and did not identify the party to whom the supplier furnished materials, as required by the Act. The court rejected the supplier’s argument that its failure to name the subcontractor in the December letter was insignificant because the supplier had told the general contractor in a prior phone conversation that it was supplying materials to the subcontractor. The court held that, even if the December letter had incorporated the prior phone conversation by reference, which it did not, such reference would still not satisfy the notice requirements of the Act as the Act made no provision for a verbal modification of its requirement for written notice. The court also held that a claimant cannot do away with the Act’s requirement for written notice by merely alleging, after the fact, that the contractor knew which subcontractor received the supplies. Such a result would render the Act’s notice requirement a nullity.

Bonds issued pursuant to the federal Miller Act and states’ Little Miller Acts generally require that notices to the surety and/or the principal be given within a specified time period and contain particular information in order to be valid. CTI/DC warns claimants to ensure that they comply strictly with all such notice requirements.

 

FEDERAL COURT HOLDS THAT GENERAL CONTRACTOR’S ORAL PROMISE TO AWARD SUBCONTRACT IS NOT ENFORCEABLE CONTRACT

Many subcontractors assume that the oral promise of a general contractor to enter into a contract at some future point can be enforced against the contractor when they have submitted a proposal that the contractor incorporated into its bid. However, as illustrated by the case of Trident Construction Co., Inc. v. The Austin Co., 272 F. Supp. 2d 566 (D.S.C. 2003), such a promise may not be worth the paper that it is not written on.

In Trident, a general contractor, a steel erection subcontractor, and a steel supplier met to discuss working together to obtain a Navy contract for the construction of an airplane hangar. The subcontractor claimed that an agreement was forged whereby the three parties agreed to join together exclusively as a team to pursue the project, and that, if the contractor received the prime contract from the Navy, the subcontractor would receive the subcontract and the supplier would be the material supplier. Over the next several months, the subcontractor submitted several proposals to the contractor, who requested various changes and deductions. Thereafter, the contractor was awarded the prime contract based on its bid, which included the subcontractor’s proposal to erect the hangar. The contractor, although using the subcontractor’s proposal in its bid, intended all along to put the subcontract up for competitive bidding with the hope of obtaining a less expensive proposal. Thus, after it was awarded the prime contract the contractor solicited other bids while at the same time continuing to negotiate with the subcontractor, even sending the subcontractor a proposed written contract. When the subcontractor heard rumors that the contractor was soliciting other bids, it contacted the contractor who denied the rumors and confirmed that the parties were still a team. However, the contractor thereafter entered into a subcontract with a different entity. As a result, the subcontractor sued the contractor for breach of contract, promissory estoppel, and unjust enrichment. The contractor then moved for summary judgment.

The court awarded summary judgment to the contractor. First, the court found no enforceable verbal contract between the contractor and subcontractor that could have been breached. Although the alleged contract was for both goods (steel materials) and services (steel erection), the court held that the predominant factor in the contract was the provision of goods. As such, the contract was subject to the Uniform Commercial Code and its provision that contracts for the sale of $500 or more in goods are unenforceable unless evidenced by a writing and signed by the party against whom enforcement of the contract is sought. Finding no such express, signed writing memorializing the parties’ alleged verbal contract, the court held that the contract was unenforceable under the Uniform Commercial Code.

Moreover, the court concluded that, even if the Statute of Frauds did not apply, there was insufficient evidence of a binding verbal contract. Rather, the parties’ agreement was merely an “agreement to agree” and was too indefinite in its terms, due to its lack of an agreed price, to be enforceable as a contract.

Thus, Trident stands for the principle that agreements to agree, such as a verbal agreement between a contractor and a subcontractor to enter into a subcontract if the contractor wins the prime contract, may not be enforceable as contracts. Therefore, subcontractors should consider seeking a letter of intent or some other written, signed agreement from the general contractors that they will receive the subcontract if the general contractor’s bid prevails.

 

VIRGINIA’S HIGHEST COURT VOIDS CONTRACT
PROVISION LIMITING DELAY DAMAGES ON PUBLIC CONTRACT

Construction contracts often include “no damages for delay” clauses, which limit or eliminate the ability of a contractor to obtain delay damages and only provide the remedy of time extensions for delays caused by the owner. Due to the harshness of a “no damages for delay” provision, many courts have recognized exceptions to the enforceability of such clauses, such as when the delay is caused by the owner’s fraud, bad faith, active interference, gross negligence or abandonment of the contract. In addition, many states have adopted legislation affecting the scope or enforceability of “no damages for delay” clauses in public work. In 1991, the Virginia General Assembly enacted a provision of the Virginia Public Procurement Act which provides that any provision in a public construction contract purporting to waive, release, or extinguish the rights of a contractor to recover damages for unreasonable delay caused by acts or omissions of the public body is void and unenforceable as against public policy. In the case of Blake Construction Co., Inc./Poole & Kent v. Upper Occoquan Sewage Authority, 266 Va. 564 (2003), the Virginia Supreme Court had the opportunity to apply this statute against a “no damages for delay” provision.

Blake Construction and Poole & Kent (“joint venture”) entered into a contract with the Upper Occoquan Sewage Authority (“UOSA”) for the construction of a wastewater facility in Fairfax County, Virginia. Disputes arose between the joint venture and UOSA, at which point the joint venture filed suit seeking a declaration that certain contract provisions limiting the joint venture’s ability to recover delay damages were void as violating public policy. The general conditions of UOSA’s contract stated the joint venture could only recover delay damages that were for “unreasonable delay caused by the Owner or the Engineer due to causes within their control”. The contract further stated that delay damages could only be recovered if the delay was:


Determined to be both unreasonable and not in any way the fault of the Contractor . . . and which is (1) caused by the bad faith or willful, malicious or grossly negligent conduct of the Owner or Engineer, or (ii) so severe that is constitutes and abandonment of the Contract by the Owner, or (iii) results from the failure of the Owner to meet its payment obligations to the Contractor, to provide Owner supplied materials or equipment, if any, or to secure permits, rights-of-way, or easements ...


UOSA argued that so long as the parties do not, by contract, fully extinguish all monetary relief available to the contractor arising from an unreasonable delay, then no violation of the Virginia Public Procurement Act occurs. They further argued that since the statute does not specifically forbid the restriction or definition of what constitutes “unreasonable delay” a public construction contract can narrow the right of a contractor to recover delay damages so long as recovery for some type of unreasonable delay remains available, regardless of how minimal or remote. The Virginia Supreme Court disagreed noting that the plain language of the statute clearly identifies several exceptions to the statute’s general prohibition of limitations on delay damages, and that it did not allow for the parties to limit recovery by contract for unreasonable delays.

UOSA further argued that by enacting the statute at issue, Virginia intended to codify the most widely recognized exceptions to enforcement of “no damages for delay” clauses into Virginia law and that, as used in the statute, the term “unreasonable delay” is “shorthand” for the broad spectrum of judicially-created exceptions. The court disagreed, citing the statute’s clear intent that damages for unreasonable delay may not be extinguished in public construction contracts as a matter of public policy. The court held that, if the legislature intended to allow the contracting parties to extinguish or waive unreasonable delay damages in part by contract, it could have done so by specifically codifying such exceptions. Instead, the General Assembly broadly prohibited “any provision that waived, released or extinguished damages for unreasonable delay”.

The decision in Blake upholds the ability of public contractors to recover damages for unreasonable delay. Owners will no longer be able to craft provisions in their contracts that minimize contractors’ rights by narrowly defining the term “unreasonable delay.”