Construction and Procurement Law News, Q3 2015

One-sided subcontract clauses are a technique sometimes employed by general contractors to limit the risks of subcontractor claims. Notice requirements, no damage for delay clauses, and pay if paid clauses all give the general contractor contractual defenses against a subcontractor claim. But are these clauses enforceable? The answer sometimes varies by jurisdiction. In Connecticut, a recent decision indicates that the answer is yes.

In some states, notice clauses and risk-shifting clauses are enforced as written, with predictable results for a claiming subcontractor. In Electrical Contractors, Inc. v. Fidelity & Deposit Co. of Maryland, for example, Electrical Contractors, Inc. (“ECI”), an electrical subcontractor working on a laboratory facility at the University of Connecticut, asserted $1.1 million in claims for extra work and labor inefficiency against the general contractor, Whiting-Turner Contracting Company (“Whiting-Turner”). A federal district court in Connecticut granted summary judgment dismissing the majority of the subcontractor’s claims without a trial, finding that the claims were prohibited by the terms of the applicable subcontract.

ECI claimed that Whiting-Turner failed to manage the project schedule, interfered with ECI’s access to the work, and forced ECI to work out of sequence, thereby increasing ECI’s labor costs. Under the subcontract, Whiting-Turner expressly “reserve[d] the right to alter the sequencing of activities in order to accommodate project conditions….” The subcontract also contained a no damage for delay clause providing that ECI could obtain a time extension, but not delay damages, if its work was delayed, suspended, or otherwise interfered with by Whiting-Turner. The subcontract stated “[t]here is no guarantee of continuous work” and required ECI to “work in all areas as they become available and as directed by Whiting-Turner.”

The district court found that these provisions precluded ECI’s impact and inefficiency claims, which were based on working out of sequence at Whiting-Turner’s direction. Indeed, the court found that “the Subcontract unambiguously grants [Whiting-Turner] complete discretion over the scheduling and sequencing of ECI’s work….” The court acknowledged, as a limitation, that “an entirely unreasonable” sequencing of ECI’s work by Whiting-Turner might breach the implied covenant of good faith and fair dealing, but the court rejected that claim in this case because ECI failed to comply with the seven day notice requirement for claims set forth in the subcontract.

The court held that ECI’s failure to give notice of its claims within seven days resulted in the waiver of its claims under the plain wording of the subcontract. A variety of equitable arguments advanced by ECI to circumvent the notice requirement were rejected by the court. For example, the court rejected ECI’s claim that Whiting-Turner had actual notice of its claims, because the subcontract required written notice. The court was not concerned about whether the lack of timely notice caused any prejudice to Whiting-Turner, even though “no prejudice” is sometimes cited by courts who have adopted a more relaxed interpretation of notice provisions. The court also found that daily report references to inefficiencies experienced by ECI did not amount to contractual notice of a claim. Indeed, the court found that a letter from ECI concluding that ECI “will be submitting … costs … in the form of a claim as per our contract” was deemed insufficient to actually state a claim because, according to the court, the letter referred to a claim that would be made in the future. Finally, the court was not persuaded that it was too difficult to quantify ECI’s claim within seven days, because that argument only excused the failure to quantify the claim but not the failure to give notice of the claim.

In addition to scheduling provisions, no damage for delay, and notice, the court also relied on a pay if paid clause to dismiss all but one of ECI’s claims for extra work. The pay-if-paid clause provided that Whiting-Turner could not be liable to ECI for an extra work claim unless the Owner had paid Whiting-Turner for the extra work. For all but one of ECI’s extra work claims, Whiting-Turner showed that the Owner had rejected the claim. For the one surviving claim, the court found that Whiting-Turner may not have submitted the claim to the Owner. To rely on this clause, the court reasoned that Whiting-Turner had to “act in good faith” and seek payment for the claim from the Owner. Because it was not clear whether Whiting-Turner submitted this claim to the Owner, the court refused to dismiss it.

The court acknowledged that its interpretation of the subcontract was “strict,” but it reasoned that “the parties are sophisticated business entities capable of assuming such obligations knowingly.” The court also noted that the subcontract recited that ECI had “carefully examined” the subcontract and had the opportunity to consult with an attorney about it. For a general contractor seeking to protect itself from late and poorly stated claims, this case is enormously helpful, but contractors should also be aware that not every court is willing to adopt such a strict interpretation of claims limitation clauses in a subcontract. Seemingly clear contract clauses can be interpreted differently by different courts in different states. Before entering a different state, you should consult with an attorney to determine whether the courts in that state tend to enforce contractual claims limitation clauses or whether they tend to look for ways around them. Armed with that information, the contractor and subcontractor can negotiate an appropriate contract and accurately price the risks of delay, labor inefficiency, and extra work under the subcontract. If the subcontractor cannot satisfy itself that the risks have been fairly allocated, it should decline the work, as difficult as that may be.