Construction Corner - August 2020

The case of Semac Electric Co., Inc. v. Skanska USA Building, Inc, 195 Conn. App. 695 (2020), should serve as a warning/reminder to all Contractors - read your contract documents carefully. More importantly, never assume that one-sided and seemingly unfair "CM Friendly" provisions will not be enforced by the Courts.

BACKGROUND

Construction Manager (CM) hired an Electrical Contractor (EC) on a 12-floor hospital project "loaded with specialty wiring needs and equipment." The subcontract, which was for almost $15 million dollars, was over 241 pages long! It included the following "CM Friendly" provisions/representations:

1. EC had "taken into consideration and made allowances for all hindrances and delays incident to its work."
2. EC would perform its work in accordance with the construction schedule, which could be revised and amended by CM from time to time.
3. CM was allowed to determine the time, order and priority of various portions of the EC's work and EC would not be entitled to any adjustment in price or time due to these determinations.
4. Additional heavy-handed clauses dealing with change directives, delay damages and CM's right to accelerate and require overtime.
   Soon after starting the project, CM was delayed and took certain steps to recover its schedule. According to EC, these steps including forcing EC to perform its work out of sequence and in an extremely inefficient manner. CM also issued over 38 change orders (likely without full agreement from EC on additional cost or time).

Given these "drastic and unforeseen" modifications to its initial schedule and sequencing, and after working several months on the project, EC sent CM a Notice of Cardinal Change. The notice asserted that the electrical work CM was now requiring EC to perform was completely different than it could have "reasonably anticipated or contemplated" at the time of contract execution. In response, CM sent a Notice to Cure letter and then terminated EC the following day. A lawsuit ensued with both EC and CM raising various claims, including breach, wrongful termination, and fraud. Certain claims were dismissed by the trial court and an appeal was taken.

THE DECISION

First, the Appellate Court defined a cardinal change as "a drastic modification beyond the scope of the contract that altered the nature of the thing to be constructed." The party that made such a change would be in breach of contract. As such, each case had to be analyzed based on its own facts and circumstances. Here, the Court relied heavily upon the above referenced clauses and ultimately ruled that EC breached the contract by walking off the job. These clauses, though clearly one-sided, required EC to anticipate the very type of issues that it ended up encountering on the job, i.e., delays, acceleration, scheduling changes and changes in coordination. Indeed, and although the Court recognized that the project experienced multiple delays, that the delays were significant, and that they resulted in EC having to completely re-sequence its work, this was all part of the "risk" assumed by EC when it entered into the subcontract.

EC's case was not helped by the fact that it executed CM's numerous change orders (change orders that CM was allowed to set the price on). The change orders expressly required EC to attest that it had been fully compensated for "all costs, claims, markups and expenses, direct or indirect, attributable to this or any other prior change orders" and "for any delays, acceleration or loss of efficiency encountered by EC in performance of the work through the date of this change order." EC executed its last change order, with these attestations, just two weeks before it served its notice.

All was not lost for EC. Ironically, the Court also determined that CM was in breach of the contract! The contract documents required CM to provide EC with 48-hours to cure before termination. CM provided only 24 hours. Presumably, and given EC's assertion that it was walking off the job, CM believed the 48-hour cure period had been waived. It was not. The Court held that CM, who relied so heavily upon certain contractual language to justify its right to modify the agreement, could not ignore the 48-hour notice provision. In the end, and given the dual breaches, both parties' alleged damages were reduced.

CONCLUSION

The CM friendly contract clauses above are industry standard for many of the area's largest builders. While contractors on large projects have limited negotiating power, the opportunity often exists to make a few key contractual edits. These edits can have tremendous implications down the line. Regardless, contractors should be aware of the risk profile of any projects they intend to work on. If a contractor knows ahead of time that it could be forced to accelerate without compensation, it might put in a higher bid or pass on the job all together.

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N.Y. Payment Bonds: Owner's Failure to Record Could Lead to Contractor's Recovery of Attorney's Fees

In New York, most public projects require payment bonds- a surety backed guarantee of payment to subcontractors and suppliers. These payment bonds are also known as section 137 bonds, named after New York State Finance Law §137.[1] These §137 bonds generally apply to State projects over $100,000 in value. In addition, and via sections of New York's Highway Law, Village Law, Canal Law, etc., payment bonds are required on projects involving highway, sewer, and canal improvements. As discussed in prior newsletters, §137 bonds have strict notice requirements which, if not followed, often result in a waiver of claim.

Payment bonds are not limited to the public sector. Many of the larger private projects require the Prime Contractor to secure payment bonds. While subcontractors/suppliers (subcontractors) often know if their project has a bond, they rarely secure a copy of it prior to commencing work. Their ability to obtain a copy later on, especially in the midst of a payment dispute, is usually limited. Without a copy of the bond, the subcontractor may not know what surety it has to notify of its claim- setting up the potential that its claim could be waived. 

This is where N.Y. General Obligations Law §5-322.3 comes into play. It requires project owners, within 30 days of receipt, to file payment bonds with the County Clerk of the City where the project is located.[2] If this law is followed, a subcontractor need only go to the appropriate clerk's office and search the subject property records. But what if the owner never filed the bond? Incredibly, §5-322.3 holds such an owner liable to a successful bond claimant for its attorney fees.

TAKEAWAY

For owners, and regardless of a lack of contractual liability, failure to file a payment bond could result in significant liability. Construction disputes are expensive and you do not want to be on the hook for a successful claimant's attorney's fees. 

For contractors, it is in your best interest to make sure your bond is filed. Otherwise, and assuming the owner is held liable for attorney's fees, it will likely come after you for indemnification. You are already responsible for the surety's fees in defending any claim against the bond, you don't want to be on the hook for the claimant's fees as well!

Finally, subcontractors and suppliers should make it a habit to search the county clerk records on private projects where there may be a payment bond. If the bond is not filed, and if you run into a payment dispute down the line, you could have a viable claim for attorney's fees against the owner.
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[1] This statute is commonly referred to as the Little Miller Act. The "Big" or original "Miller Act" refers to the Federal statute on payment bonds, 40 U.S.C. §3131(b)(2).
[2] Importantly, and unlike the Little Miller Act, §5-322.3 does not require payment bonds, it only deals with an Owner's obligation if one has been posted.