March/April 2002 Newsletters

 

Katz & Stone, L.L.P. Construction Newsletter
March/ April 2002

 

EVEN WITHOUT AN ENFORCEABLE CONTRACT, GEORGIA COURT FINDSSUBCONTRACTOR LEGALLY OBLIGATED TO PERFORM WORK AT BID PRICE BECAUSE OF GENERAL CONTRACTOR’S USE OF THE BID

Many subcontractors consider themselves legally bound to a bid only upon the execution of a contract with the general contractor or, at the earliest, upon the general’s notice of acceptance of the bid. As the case of SKB Industries, Inc. v. Insite, 250 Ga. App. 574 (2001) demonstrates, however, subcontractors may become bound to perform according to a bid’s terms, even if the bid contains an error in pricing, by the general contractor’s mere use of the subcontractor’s bid in bidding to the owner.

In SKB Industries, a general contractor included a landscaping subcontractor’s bid in its own bid to a project owner. After concerns were expressed about the materials included in the subcontractor’s bid, the subcontractor submitted a revised bid for the landscaping work. After further negotiation with the owner, the contractor was awarded the project, and thereafter sent the subcontractor a written subcontract to execute. The subcontractor never signed the subcontract and ultimately refused to do a large portion of the work included in its bid. As a result, the contractor was forced to perform that work itself at a substantially higher price. The contractor brought suit against the subcontractor to recover the difference between its cost to perform the work and the price for the work submitted by the subcontractor in its bid. A jury found for the contractor, awarding it both damages and litigation expenses, and the subcontractor appealed.

The Georgia Court of Appeals upheld the jury award, finding that the subcontractor’s bid was enforceable against the subcontractor under a legal doctrine known as promissory estoppel. Under this doctrine, the court concluded that, to enforce the bid, it needed to find: (1) that the subcontractor had made a promise to do certain work at a certain price in its bid, (2) that the subcontractor should have expected the contractor to rely on the promise in its bid, (3) that the contractor was harmed by its actual reliance on the subcontractor’s bid, and (4) that injustice to the contractor could only be avoided by enforcement of the subcontractor’s bid. In SKB Industries, the subcontractor clearly expected the general contractor to rely on its bid because the bid was submitted for the express purpose of allowing the contractor to bid to the owner. There was no evidence that the bid was intended to be conditional or revocable prior to the execution of a contract. Moreover, after relying on the subcontractor’s bid to obtain a contract with the owner, the general contractor was plainly harmed by the subcontractor’s subsequent refusal to honor its bid. Therefore, the court concluded, despite the absence of a written contract between the parties, the subcontractor was liable to the contractor for the increased cost of completing the subcontractor’s work, as well as the contractor’s litigation expenses.

The Georgia Court of Appeals’ ruling in SKB Industries is part of a trend among many states to enforce a subcontractor’s bid that a general contractor has relied upon to its detriment. However, subcontractors need not be bound to honor the terms of their bids without the security of a written contract. Rather, subcontractors can and should protect themselves by expressly stating in their bid that their obligation to perform the work described therein is subject to the negotiation of a mutually-agreeable contract.

 

 

SUBCONTRACT ARBITRATION AGREEMENT USED TO STAY
SUBCONTRACTOR’S MECHANIC’S LIEN AND PAYMENT BOND CLAIMS

 Arbitration agreements are strongly favored by federal and most state laws. Indeed, the United States Supreme Court has held that federal law indicates a national policy favoring arbitration and enforcing agreements to arbitrate. However, a party cannot be required to submit to arbitration unless he has agreed in advance to arbitrate a dispute. Most courts, in deference to the strong public policy favoring arbitration, will tend to resolve any doubts concerning the scope of the arbitration clause in favor of arbitration.

In Triad Electric & Controls, Inc. v. Watkins Engineers & Constructors, Inc., 2001 U.S. Dist. LEXIS 15513 (2001), a federal court in Texas illustrated the broad reach with which courts will interpret arbitration agreements. The court held that a subcontract’s arbitration provision required the subcontractor to submit not only its breach of contract and tort claims to arbitration but also its statutory payment bond and mechanic’s lien claims.

The dispute at issue arose out of a design-build contract entered into between Watkins Engineers & Constructors, Inc. (“general contractor”) and the Holnam Texas Limited Partnership (“owner”) to construct a cement production line in Midlothian, Texas (the “project”). The general contractor subcontracted with Triad Electric & Controls, Inc. (“subcontractor”) to perform and install various electrical and instrumentation work on the project. The subcontract incorporated the prime contract’s dispute resolution procedure, under which “[a]ll claims, disputes, and other matters . . . arising out of or relating to the Contract Documents or the breach thereof . . . will be decided by binding arbitration.”

A payment dispute arose between the general contractor and subcontractor. As a result of the dispute, the subcontractor filed a mechanic’s lien against the owner’s property. In turn, the general contractor “bonded off” the lien by entering into an agreement with a surety (“surety”) to post a bond to indemnify against the subcontractor’s lien. The subcontractor then sued the general contractor, owner and surety alleging (1) the general contractor’s breach of the subcontract, (2) a mechanic’s lien on the owner’s property, and (3) a bond claim against the general contractor (as the bond’s principal) and the surety. The general contractor and the surety each filed a motion to compel arbitration and to postpone all court proceedings, including the payment bond and mechanic’s lien claims, pending completion of the arbitration.

Although the subcontractor conceded that its claims against the general contractor were covered by the arbitration agreement, it contended that its lien claim against the owner and its bond claim against the surety were not subject to arbitration and should not be stayed. The subcontractor argued that staying the lien proceeding would unlawfully limit its lien rights under state law. The court, however, held that staying the proceeding would not limit the subcontractor’s lien rights against the owner because under Texas law “a lien is inseparable from the debt giving rise to it.” Thus, the enforceability of the lien could not be determined until it was first determined what amount, if any, was owed under the contract. Because the underlying contract dispute was subject to arbitration per the arbitration agreement, the subcontractor’s lien suit had to be postponed pending the arbitration’s outcome.

On the bond claims, the subcontractor raised a host of arguments that its claims against the general contractor and surety could not be stayed. The court rejected all of them. As to the bond claim against the general contractor, the claim was stayed because, as with the mechanic’s lien suit, the claim was inseparable from the subcontractor’s underlying contract dispute with the general contractor. As to the bond claim against the surety, the court conceded that the claim was not arbitrable because the surety was not a party to either the prime contract or the subcontract. Thus, the surety and subcontractor had not agreed to arbitrate their dispute. The court, however, stayed the subcontractor’s claim against the surety, reasoning that the subcontractor’s bond rights against the surety were premised on its right to collect its contract balance, and that right would not be established until the arbitration was complete.

For subcontractors who have agreed to arbitrate disputes arising out of a subcontract, Triad Electric demonstrates that the enforcement of mechanic’s lien or payment bond rights may be postponed by a court until an arbitration proceeding resolving the subcontractor’s underlying contractual dispute is concluded. Nevertheless, the mere fact that a bond or lien enforcement action may be postponed pending arbitration, does not relieve subcontractors from taking in a timely fashion whatever steps are necessary to establish or preserve their bond or lien rights. Even if one has signed an arbitration agreement, it is highly advisable to consult your attorney about filing a lien and/or payment bond claim because delays in filing such claims could result in their being lost.

 

 

VIRGINIA WORKER’S COMPENSATION LAWS DO NOT INSULATE CONTRACTORS FROM CLAIMS BY INJURED EMPLOYEES OF MATERIAL SUPPLIERS

The compensation provisions of the Virginia Worker’s Compensation Act are an injured or deceased employee’s exclusive remedy against his or her “statutory employer.” No other legal action may be taken by the employee against his or her statutory employer, as that term has been defined by the Act and by case law. The Act, however, does not bar lawsuits by an employee against a party other than his or her statutory employer. In the context of construction work, it is well-established under Virginia law that a contractor will be deemed the statutory employer of a lower-tier contractor’s injured employee if the employee is engaged in the trade, business or occupation of the higher-tier contractor at the time of his or her injury. Thus, an injured employee of a subcontractor is precluded from suing a higher-tier contractor in the same trade by the exclusive remedy provisions of the Act. In the recent case of Bosley v. Shepherd, 262 Va. 641 (2001), the Supreme Court of Virginia further defined the meaning of statutory employer by ruling that a material supplier’s injured delivery employee was not barred by the exclusive remedy of worker’s compensation from suing contractors on a construction project, even when such employee used specialized equipment in the delivery of construction supplies.

In Bosley, a general contractor working on a construction project for the Navy contracted with various subcontractors, including a drywall subcontractor. The drywall subcontractor contracted with a supplier for the purchase and delivery of sheetrock drywall. The supplier’s employee delivered sheetrock to the construction site on a flatbed truck equipped with a boom crane.

The employee deposited the sheetrock in various locations at the construction site. One location involved maneuvering the crane’s boom inside a second-floor opening that was restricted by a steel girt. Apparently, the steel girt was resting on its brackets but was neither temporarily tack welded nor permanently attached. As a result, when the employee accidentally bumped the steel girt with the crane’s boom, the girt dislodged and fell on the employee, causing serious injury.

The employee sued the general contractor for its alleged negligence in failing to properly secure the girt to its brackets. A jury returned a verdict in favor of the employee in the amount of $325,000. The general contractor appealed the jury verdict arguing that it was the statutory employer of the drywall employee under the Act and, therefore, the employee was barred from suing. The contractor contended that the employee was engaged in an act of construction because he was required to use “specialized” equipment (i.e., the boom crane) in the delivery of construction materials.

Virginia courts have previously held that a supplier’s employee who merely delivers materials to a job site is not engaged in the trade, business or occupation of construction. In contrast, when an injured employee’s duties extend beyond delivery of materials to the job site and the employee performs an act that is an essential part of the work of the general contractor, the injured employee has engaged in the trade, business, or occupation of construction. Under the latter situation, the contractor would be deemed the statutory employer of the employee and be entitled to the exclusive remedy protection of the Act.

In Bosley, the Supreme Court of Virginia held that the nature of the delivery work the injured employee performed was not altered by the fact that he used a crane to place the materials at the required locations. The employee’s actions remained actions of delivery, not of construction, because when he used the crane to place the sheetrock at the specified locations, he did not engage in any other action regarding the sheetrock to further the work of the general contractor. Thus, the court concluded that the general contractor was not the statutory employer of the employee and, as such, the employee was not foreclosed from pursuing his negligence claim against the general contractor or subcontractors.

With regard to material suppliers’ employees, contractors and subcontractors should be aware that Virginia courts continue to hold that the exclusive remedy provisions of the Worker’s Compensation Act do not protect them against lawsuits by a supplier’s delivery employee. Consequently, where permitted by state law, contractors should seek in their contracts with suppliers to be indemnified or insured against any liability to the supplier’s injured employees.