Foundation subcontractor sought extra payment for alleged differing site conditions related to rock found in the excavation area. The geotechnical report provided by the contractor showed several boring holes with this type of hard rock. But an email from the contractor to the subcontractor prior to bid date stated the rock would be Schist – consisting of mud and clay. The email also stated that a small portion of the site appears to be underlain by Ultramafic and Gabbroic Rock. The contract contained a pay-when-paid clause. Contractor submitted to the General Contractor the subcontractor’s change order requests and other payment requests. While this was being analyzed by the GC the subcontractor stopped working and left the job -alleging that the contractor breached the contract by not prosecuting the claims to the Owner and by not promptly paying the subcontractor. Trial court and appellate court found the subcontractor did not reasonably rely on the contractor’s email and was warned of the conditions via the Geotech Report. The evidence demonstrated that the contractor acted in good faith and fair dealing and was actively seeking payment of the subcontractor requested change orders when he breached the contract by stopping work. Dietzel Enterprises, Inc. v. J.A. Wever Construction, LLC, 312 Neb 426 (2022).
The court determined that due to the pay-when-paid clause, the contractor had no obligation to pay the subcontractor “unless and until it received payment from [the GC]….” The court held that the subcontractor breached the contract by stopping its work.
Negligent Misrepresentation. Evidence at trial showed that the subcontractor admitted that the Geotech report “was the best source of information about subsurface conditions and that it was available to him when he formulated [subcontractor’s bid].” But the contractor alleged he relied on the email that he received 30 minutes earlier than when the contractor emailed him the Geotech report. He alleged that he relied on that first email and would not have submitted a bid but for the description of the conditions contained in that email. He alleged that contractor’s email constituted a negligent misrepresentation. That claim was rejected by the court because it held that the subcontractor did not justifiably rely on the representation contained in that email. The Geotech report that provided the correct information should have been relied upon by the subcontractor.
Good Faith and Fair Dealing. The subcontractor notified the contractor that it was unable to begin its excavation work on time. As a result, the contractor began doing excavation work for three (3) weeks before the subcontractor took over the work. During that them the contractor encountered hard rock in certain areas of the site. It failed to advise the subcontractor of those conditions. The subcontractor’s complaint alleged that this constituted a breach of the covenant of good faith and fair dealing. The court rejected that argument because it found the contractor was not obligated to inform the subcontractor about the hard rock because “the existence of the rock was something [Subcontractor] should have contemplated given the information that was available to it at time it submitted its bid.” The court noted that “the implied covenant of good faith and fair dealing exists in every contract and require that none of the parties do anything which will injure the right of another party to receive the benefit of the contract.” In this case, the court found no evidence of breach of the duty.
Pay-When-Paid Contract – Adequate Assurances of Prosecution of claim
Subcontractor submitted requests for “progress payments” as well as requests for payment on “change orders.” No one at the contractor ever disputed the change order requests or stated that they were rejecting the change order requests or otherwise not submitting them upstream to the prime contractor for review and payment. In fact, there was email between the parties acknowledging that the change orders had been submitted by the contractor up to the GC for payment. There was also a meeting between the parties at some point where the upstream review process had been discussed. The subcontractor therefore had no basis for arguing that the contractor was obligated to assure it that it was “prosecuting” the change order with the GC and that it would pay the subcontractor for the change orders.
For these and other reasons, the appellate court affirmed the trial court’s decision denying the subcontractor claims.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 25, No. 3 (March 2023).
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