Inside this Issue

A1 - Third Party Beneficiary Claim against Subcontractor
A2 - Lien Waiver and Release Forfeited Prime’s Right to Assert Subcontractor Pass-Through Claim
A3 - Single Employer Site Safety Liability: GC Found Responsible for Acts of its Subcontractor

Article 1

Third Party Beneficiary Claim against Subcontractor

A city filed suit against an engineering subcontractor, asserting that the city was a third-party beneficiary of the subcontract. The subcontractor filed a motion for summary judgment, arguing that the city lacked privity of contract to file suit. The motion was denied because the city showed a clear intent by the parties of the subcontract to benefit the city; a duty was imposed on subcontractor in favor of the city; and the performance of the subcontract terms rendered the third party (city) a direct benefit that was intended by the parties to the contract.

City of Whiting v. Whitney, Bailey, Cox & Magnani, LLC, (U.S. District Court, N.D. Indiana, March 20, 2018).

In this case the city was developing a project to develop waterfront property along Lake Michigan. It hired an engineering firm, American Structurepoint, Inc., as the prime consultant on the project. That firm subcontracted with Whitney Bailey for marine engineering services. Specifically, Whitney was to design a rock revetment to be built along the shoreline for protection. The revetment failed three times according to the city’s complaint.

The city filed suit against the prime consultant and that suit was settled. But the city sought to recover additional damages directly from the subconsultant. A number of theories of recovery were addressed by the court, including claims based on assignment, indemnity and economic loss. This current article, however, addresses on the issue of breach of contract based on third party beneficiary status.

The court began its analysis be explaining the three things a plaintiff must show in order to demonstrate that it is an third party beneficiary of a contract between other parties. The court states:

“A plaintiff must show: (1) [a] clear intent by the actual parties to the contract to benefit the third party; (2) [a] duty imposed on one of the contracting parties in favor of the third party; and (3) [p]erformance of the contract terms is necessary to render the third party a direct benefit intended by the parties to the contract."

For the first factor, in this case the court found that the subcontract demonstrated an intent to benefit the city because the city is referred to by name as the party for whom [Subconsultant’s] engineering services are being performed,” and the Prime Agreement was incorporated by reference into the subcontract stating that [Subconsultant] shall be obligated to the applicable provisions … of the “Prime Agreement.” The court states that this “certainly evinces either intent or awareness on the part of the parties that their actions would benefit the city.”

The fact that the subcontract did not contain a “no third-party beneficiary” clause was also a consideration by the court. As put by the court, “This fact, by itself, does not prove any intent to create a third-party beneficiary. But, it also demonstrates the absence of any affirmative intent to avoid third party status.”

For the second factor by which the city must demonstrate that the subcontract placed a duty on one of the contracting parties in the city’s favor, the court explained that the incorporation of the Prime Agreement supported that conclusion and that the contract provision requiring transfer of ownership of the Subconsultant’s instruments of service constituted the type of duty owed by the subconsultant needed to show third-party beneficiary rights of the city. “This duty [the transfer of documents ownership] on its own, is enough to satisfy this second prong….”

Another duty that satisfies the second prong is the duty that the subconsultant had to perform its services “in a manner consistent with that degree of skill and care ordinarily exercised by members of the same profession.” The court stated that although the city was not explicitly mentioned in the same paragraph as this duty, the only reasonable conclusion is that “the performance of this duty will result in a direct benefit to the City, as intended by the parties.”

The third prong was deemed satisfied by virtue of the fact that “the City will receive the direct benefit of the work to be done, and of any additional duties (including the duty regarding ownership of documents), as intended by the parties”.

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 Construction Risk 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.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 20, No. 6 (June 2018).

Article 2

Lien Waiver and Release Forfeited Prime’s Right to Assert Subcontractor Pass-Through Claim

A prime contractor on a federal government contract was held to have waived pass-through claims of its subcontractor by virtue of having signed a series of lien waivers and releases. To receive payment under the subcontract, the Sub was required to sign these periodic waivers and releases with its applications for payment. The court found that the releases contained a general release whereby the sub irrevocably and unconditionally waived any claims in connection with the contract “through the end of the period covered by this Application.” There was no exception to allow for subcontractor pass-through claims to be filed.

Because the terms of the release were clear and unambiguous, the court would not consider extrinsic evidence that might have demonstrated an intent by the parties to preserve pass-through claims. The court also rejected the request by the parties to reform the release. That is because the court stated it lacked jurisdiction to reform an agreement between a prime contractor and its sub – the court’s jurisdiction being limited to contract claims between a plaintiff and the Government. M.W. Builders v. United States, 2018 WL 1150729 (Fed.Cl. 2018).

The subcontractor cited a number of U.S. Court of Claims cases in support of its argument that the pass-through claims were not waived. MW Builders cited Metric Constructors, Inc. v. United States, 314 F.3d 578, 584 (Fed. Cir. 2002), for the proposition that partial releases do not bar pass-through claims against the Government, where the parties did not intend to release pass-through claims. In finding that reliance on that case was misplaced and did not help the subcontractor in the current case, the court explained that the releases that were considered in that decision contained qualifying language, i.e., “to the extent of payments actually received,” and that it was the ambiguity of that wording that permitted the subcontractor in that case to maintain its pass-through claims.

The court found that: “Unlike the lien waiver and release in Metric Constructors, MW Builders’ and Bergelectric’s lien waiver and release contained an irrevocable and unconditional waiver of “any other claims whatsoever in connection with this Contract and with the Realty through the end of the period covered by this Application.” (emphasis added). Rather than releasing claims, to the extent payments were received, MW Builders’ and Bergelectric’s lien waiver and release expressly reserved only those claims arising after the date of the Application for Payment. As such, the court determined that the release language unambiguously ‘waive[d] all of Bergelectric’s claims against MW Builders and any related pass-through claims against the Army Corps.’ Therefore, extrinsic evidence was not relevant, required, nor admissible to interpret the text of the release.”

Comment: When reviewing and negotiating contracts (both prime contracts and subcontracts) it is not uncommon to find contract language stating that the contract agrees to waive all rights to file liens and will indemnify the project owner against any claims and damages arising out of the filing of liens. Some, but not all states, do not permit enforcement of such waiver of lien rights. Rather than depend on state law to reform the contract, it is prudent to modify such language to state that the right to file liens is only waived as to amounts actually received on invoices. Other language may state that a partial lien waiver and release of claims must be submitted with each invoice or pay application. Again, the decision in this case shows the importance of carefully and clearly excepting out of such waivers and releases any claims the parties intend to preserve.

Article 3

Single Employer Site Safety Liability: GC Found Responsible for Acts of its Subcontractor

OSHA fined a general contractor (GC) for violations committed by its subcontractor related to an accident at a construction worksite where two roofers fell over twenty feet and sustained serious injuries when a spruce board used for scaffolding snapped in half. OSHA cited both the GC and its subcontractor. Two alternative theories were raised by OSHA and sustained by an administrative law judge at the Department of Labor and subsequently by the Court of Appeals: (1) the GC and subcontractor constituted a single employer and (2) the individual owner of the subcontractor was a supervisory employee of the GC. A multifactor test was applied to find the subcontractor owner was a supervisory employee of the GC. Further, based on findings of common worksite, interrelated and integrated operations, and common management or supervision, the court agreed that the firms acted as a “single employer.” A.C. Castle Construction Co., Inc. v. Acosta, 882 F.3d 34 (1^st Cir. Ct. of Appeals, 2018).

The court applied what is known as the Darden test to determine whether the individual was a supervisory employee. In this regard, the court concluded:

The ALJ properly focused on the most important factor, control, finding that LeBlanc [owner of the GC] “exercised an unusual amount of control over Mr. Provencher’s [owner of the subcontractor] actions, atypical of a traditional contractor/subcontractor relationship.” In expanding on this finding, the ALJ also looked at the source of instruments and tools, the assignment of work, the length of the relationship, and the hiring of other workers. Specifically, the ALJ stated:

Mr. LeBlanc and Mr. Provencher had a thirty-year working relationship. Mr. LeBlanc scheduled the roofing projects and told Mr. Provencher in what order they were to be done, which necessarily determined the location of the work. Mr. LeBlanc arranged for the building materials to be delivered to the worksites and provided the dump truck .... He also arranged for the only safety training provided to the roofing crew and provided Mr. Provencher with a copy of A.C. Castle’s safety program and instructed him to implement it. Mr. LeBlanc told Mr. Provencher when he needed to hire more employees to complete the contracted roofing projects on time. Mr. Provencher paid the roofing crew members on Fridays, after he received payment from Mr. LeBlanc. Mr. Provencher did not have a business license and could not bid on projects; he was dependent on A.C. Castle for the great majority of his work. Mr. LeBlanc conducted spot inspections on Mr. Provencher’s worksites and instructed him to abate specific safety infractions.

LeBlanc also appears to have directed Provencher to double up the spruce planks sold at the hardware store when used as scaffolding (a direction ignored on the day of the accident).

The court cited many other examples of how the subcontractor was treated as an employee supervised by the GC.

Other evidence that the GC controlled the subcontractor owner included the fact that for a worker’s compensation affidavit he signed a form checking a box representing that he was “an employer with employees” instead of checking the box that stated, “I am a general contractor and I have hired the sub-contractors listed on the attached sheet.”

The court also noted that the GC “made sure that his customers understood that all the workers on the project were his employees” and to that end, “he prohibited Provencher from describing himself to the customer as a subcontractor. The court states that the GC’s representations were representations that he controlled Provencher as an employee, not as an independent contractor.

The court states that the ALJ might well have concluded the analysis after correctly determining that Provencher was a supervisory employee. Having gone further, however, and applied the “single employer” test, there was no basis to reverse the decision.

The single employer test treats as a single entity two businesses where there is “a combination of most or all of the following factors: a common worksite, a common president or management, a close interrelation and integration of operations, and a common labor policy”. Without explanation, the Commission reformulated that test to hold that “when ... two companies share a common worksite such that the employees of both have access to the same hazardous conditions, have interrelated and integrated operations, and share a common president, management, supervision or ownership, the purposes of the [OSH Act] are best effectuated by the two being treated as one. [citations omitted].”

In this case the ALJ found that the GC and subcontractor shared a common worksite where the accident occurred; that the operations of the two were integrated to a degree well beyond what one would expect to find in the customary relationship between a GC and subcontractor; and that there was common management or supervision.

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ConstructionRisk.com Report (June 2018)